Are Cash Donations Costing You in Taxes?

Many people automatically reach for their credit card or checkbook when considering charitable giving. Cash contributions seem simple, quick, and kind. Cash, however, may be the least tax-efficient asset to donate, a surprising fact that could alter your approach to charitable giving. 

For business owners, pre-retirees, and those with substantial assets, understanding charitable giving strategies beyond cash could dramatically increase your impact while potentially reducing your tax burden. Let's explore why you might want your next charitable contribution to come from somewhere other than your bank account.

The Cash Donation Misconception

For sophisticated donors, cash donations can be a lost opportunity, even though they seem simple, instantaneous, and giving. When you make a cash donation, you get a tax deduction for the full amount donated. Until you think about the alternative, this often makes sense.

Cash donations are often referred to by economists as the "opportunity cost." That cash sitting in your bank account probably hasn't appreciated much, so you're not avoiding any capital gains taxes. You're getting the minimum possible tax benefit for your charitable dollar.

Consider this scenario: You want to donate $10,000 to charity. If you write a check, you get a $10,000 tax deduction. However, if you donate appreciated stock worth $10,000 that you purchased for $6,000, you not only receive the same $10,000 tax deduction, but you are also exempt from paying capital gains taxes on the $4,000 appreciation. For someone in a 20% capital gains tax bracket, that's an additional $800 in tax savings.

The Power of Giving Appreciated Assets

When given to charity, non-cash charitable gifts, such as stocks, real estate, and business interests, can offer considerable tax benefits. This approach is especially popular, as 63% of assets transferred to donor-advised fund accounts between July 2023 and June 2024 came from non-cash charitable gifts.

Stocks and Securities: Instead of selling appreciated stock and donating cash (triggering capital gains taxes), you transfer the stock directly to charity. The charity sells the stock tax-free, and you avoid capital gains entirely while claiming the full market value as a deduction.

Real Estate: A business owner who purchased commercial property for $500,000 that's now worth $1.2 million can donate the property and potentially save tens of thousands in capital gains taxes while claiming the full current value as a charitable deduction.

Business Interests: A more sophisticated strategy involves donating business interests to charitable organizations. If you own a 10% stake in a company worth $2 million, donating it provides the charity with $200,000 in value. At the same time, you avoid capital gains taxes and receive a $200,000 tax deduction.

Why Some Non-Cash Charitable Gifts May Fail

Non-cash charitable gifts may get rejected by the receiving organizations, mainly due to:

• Lack of Proper Documentation: Donations over $5,000 require Form 8283 Section B
• Unmarketable Assets: Illiquid investments or restricted securities can prove problematic
• Insufficient Due Diligence: Both donors and charities must understand asset value and marketability
• Mismatched Expectations: Donors often overestimate values or underestimate liquidation time

How Financial and Tax Advisors Can Help

Given the complexity of non-cash charity giving, it is imperative to get competent financial counsel. A knowledgeable group of financial and tax advisors can help you navigate this by: 

• Conducting Asset Inventory: Reviewing holdings to identify optimal donation candidates
• Coordinating Professional Teams: Orchestrating appraisers, tax attorneys, and administrators
• Timing Optimization:
• To help optimize tax benefits, consider using bunching techniques such as combining donations from several years.
• Implementing Donor-Advised Funds: These vehicles enable immediate contributions of appreciated assets while allowing for the distribution of grants to charities over time.

Advanced Strategies for Maximum Impact

To increase your charitable impact, consider these extra charitable giving strategies:

Charitable Remainder Trusts: These trusts allow you to receive income from donated assets while ultimately benefiting a charity, making them an attractive option for business owners nearing retirement.

Qualified Charitable Distributions: Individuals aged 73 and older can make QCDs of up to $100,000 directly from their retirement accounts to charity, satisfying required minimum distributions without increasing their taxable income.

Charitable Lead Trusts: Provide income to charity for a specified period before transferring remaining assets to heirs, reducing gift and estate taxes.

Give More, Pay Less: The Strategic Advantage

The mathematics becomes compelling when you move beyond cash donations. A business owner in the 37% tax bracket donating $100,000 in appreciated stock (with a $40,000 basis) saves approximately $45,000 in combined income and capital gains taxes. The same $100,000 cash donation would save only $37,000 in income taxes—an $8,000 difference.

Always consider these crucial implementation elements:

Timing: A 30% deduction of adjusted gross income is available for non-cash assets kept for more than a year. 

Records: For contributions over $5,000, maintain comprehensive records and professional assessments. 

Choosing a Charity: Select organizations that have managed and disposed of assets before.

Charitable giving strategies that utilize appreciated assets offer a powerful tool for helping pre-retirees and business owners achieve multiple goals simultaneously. You can reduce your tax burden, support causes you care about, and make a larger charitable contribution overall.

Transform Your Charitable Giving with Pioneer Wealth Management

Before making your next donation, consider that giving appreciated assets may have a bigger impact than cash. Pioneer Wealth Management guides you through charitable giving strategies while helping you maximize tax efficiency.

We help you create a giving plan that aligns with both your financial goals and your values, whether you're considering a straightforward stock donation or a more complex charitable trust.

To learn more about how more innovative charitable giving strategies can improve your donations approach and help you achieve your larger financial objectives, get in touch with us today. 

This article is for educational purposes only and is not a substitute for professional tax or legal advice. Always consult qualified tax and legal advisors about your specific situation.

Investment Advisory Services offered through CreativeOne Wealth, LLC, a registered investment adviser. CreativeOne Wealth and Pioneer Wealth Management are not affiliated companies. We are not affiliated with or endorsed by any government agency, and do not provide tax or legal advice. Investing involves risk, including possible loss of principal. No investment strategy can ensure a profit or guarantee against losses. Past performance may not be used to predict or project future results. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company.