Cash remains the most common form of charitable giving, but it is not always the most strategic. The majority of wealth in the United States is held in non-cash assets such as shares of publicly held companies. There is a significant tax advantage to donating appreciated assets that qualify as long-term capital gain assets. First, there is complete tax avoidance on the long-term capital gain. Second, the donor is able to use the fair market value (i.e. the stepped-up basis) as a deduction for that year’s tax return.
If a donor wants to take advantage of the tax savings by donating appreciated shares but wants to keep those shares in his or her portfolio, then the donor can use a charitable swap strategy. Instead of donating cash, the donor will make the same value donation in number of shares. Then, the donor will use the cash that otherwise would have been donated and buy back the same number of shares. This results in avoidance of capital gains tax, a deduction at the fair market value of the shares donated, and a reset basis for the same shares at a higher value. Donors can deduct charitable donations of appreciated assets up to 30% of adjusted gross income, making this an important and effective means of limiting tax liability. See illustrative example below.
Not all charities are equipped to accept non-cash gifts. When considering a charitable swap strategy, a donor advised fund is an effective solution. Establishing a donor advised fund with the North Texas Community Foundation allows donors the ability to donate stock and other non-cash gifts, grow the proceeds of those gifts in investment portfolios managed by the Foundation, and grant to individual charitable organizations over time. This allows the Foundation and its donors to respond to community needs while cultivating a more vibrant and resilient region where all North Texans can thrive.
The Charitable Gift Planning team is here to assist. Always consult a qualified tax advisor for personalized guidance before making any tax-related decisions.
Written by William Abigail, CPA, North Texas Community Foundation, Advisor Relations Specialist