This post is for the extremely generous folks who plan on making larger sized donations on a one-time or ongoing basis. Perhaps you have received a large inheritance and want to give some of that money away. Or you are bundling your donations into one year to lower your taxable income. Or maybe you are a high-income earner who plans to give away a substantial portion of their salary each year, as we commonly see in the Giving What We Can community! Whatever your situation, you can generously give away as much as you’d like, but you should be aware that there are limits as to how much you can claim as tax deductible.
If you are planning on giving away more than 30% of your adjusted gross income (AGI) in any given tax year, you’ll want to read on.
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AGI Limits: Cash vs. Securities
The following information pertains to donating to 501(c)(3) organizations only. The rules and tax impact for donating to private foundations and the like are more complex. So for the time being we won’t touch upon them to keep this post clear and simple.
First, If you are donating at this scale, it is likely you will be itemizing your deductions rather than taking the standard deduction so that you can lower your taxable income. If you itemize, you can deduct up to 60% of your AGI if you make donations in cash only in any given tax year.
[In years past, this cash limit was actually 50%, but The Tax Cuts and Jobs Act Of 2017 temporarily raised the limit to 60% through the year 2025. So if you’ve heard of the term “50% limit organization”, this is referring to the old cash limit for qualified, public charities; you can see a full list of what’s considered qualified here. I don’t love using that term, so instead I’ll just continue to refer to charities as qualified or 501(c)(3) orgs.]
If you are donating appreciated securities (e.g. stocks, bonds, funds, or ETFs) to a qualified charity, the rules get a little more complicated. The AGI limits are influenced by:
How long you’ve held onto the asset for: one year or more constitutes a long-term gain, whereas less than a year means you have a short-term gain
Whether or not you choose to (A) deduct based on the Fair Market Value of the appreciated asset or, (B) just the Cost Basis. The Fair Market Value, or FMV, is determined based on the date of the donation. It is the price that the asset would have likely sold for on the open market that day. The Cost Basis basis refers to the original price you paid for that asset.
Donating Appreciated Securities: Long-Term Gains
For now, let’s assume you’ve held onto your appreciated assets for more than one year, and are only facing long-term gains. Below I’ll explain the limits for appreciated securities, and then how those limits change if you add cash donations to the mix.
If you donate appreciated securities based on FMV, the AGI limit is capped at 30% for those assets. If you contribute additional cash donations in that tax year, the total AGI limit is extended to 50%, but cash must make up any excess above that aforementioned 30%. Let’s look at a couple of examples. If you are contributing based on FMV, you can deduct 30% in stocks and 20% in cash. Or you could also deduct 40% in cash and 10% in stocks. But you could not deduct 40% in stocks and 10% in cash, because the 40% exceeds the 30% AGI limit for appreciated securities.
If you donate appreciated securities on Cost Basis, the AGI limit is extended from 30% to 50%. Unlike in the case of FMV, the 50% applies to whatever ratio of securities to cash as long as you don’t exceed the total limit. So for example, you can deduct 49% of your AGI in stocks on a cost basis and 1% in cash, or if you’d like, 1% of your AGI in stocks, and 49% in cash.
Just note that the “order of operations” for deductions towards the 50% AGI limit will always be as follows: cash contributions first, then appreciated securities follow. So for example, if you are donating based on FMV, and you make a donation valued at 35% of your AGI in cash, you’ll only have 15% leftover in deductions for appreciated securities.
In general, most people choose the FMV option because it tends to offer the largest tax benefits, especially if your assets have appreciated significantly. But there are some select instances where it makes sense to deduct on a cost basis, particularly when your securities have barely appreciated. Let’s say you bought a bunch of stock at $25 a share, and they have only grown to $26 over the past few years. You could choose the FMV option, but in that case you’d only be able to deduct up to 30% of your AGI with the stock valued at $26, or you could deduct up to 50% of your AGI with the stock valued at $25. The latter option of cost basis is tax-favorable because you have a negligible $1 gain per share, as compared to the larger tax savings you could receive by taking the greater AGI limit.
With that said, when I donate securities, I choose appreciated ETFs from my portfolio that have the largest gains to avoid capital gains tax. This is probably the strategy that most people take, but not always. You may instead choose to focus on donating securities you no longer want, perhaps because you received them through an inheritance and don’t love the assets you received, or you are keen to change your investment strategy (e.g. you are trying to switch to a more socially responsible investment strategy).
Donating Appreciated Securities: Short-Term Gains
If you choose to donate appreciated assets that you’ve held onto for less than a year, then you must deduct using the Cost Basis method. And therefore the same rules apply where the AGI limit is extended to 50%, regardless of whether or not you are donating appreciated securities alone or including cash that year as well. Again, the ratio of securities to cash doesn’t matter as long as you do not exceed that 50% limit.
Donating Securities That Have Losses
As mentioned earlier, people tend to find the greatest tax benefits when they donate appreciated securities because it’s a great way to avoid capital gains tax. With that said, you can donate securities that have lost value, it just doesn’t have the same benefits. If you choose to donate securities that are now valued below their cost basis, you must base your deductions on the FMV. You cannot base your deductions on the cost basis. So if you bought a share of stock for $500, and it’s now valued at $100, your donation must be based on that FMV of $100. As you can see, the tax benefits of taking deductions for significantly depreciated stock are negligible compared to the overall capital loss you face.
With that said, if you are hellbent on donating significantly depreciated stock, you might want to sell those shares first which will grant you a capital loss on your taxes, and then make your donations in cash. Those donations are still eligible for itemizing for charitable deductions, but now in the form of cash where the limits are higher.
Exceeding the AGI Limits
What happens if you made a mistake and exceeded the AGI limits for any given tax year? You still have some leeway via the Carryover Rule, where you can “carryover” deductions for up to 5 additional years! The carryover rule also follows an order of operations: where you must count your current year donation deductions first, then the earliest year of your carryovers followed by subsequent carryover years.
This can get a little technical, so let’s walk through a more comprehensive example taking into account multiple years of carrovers, plus a mix of FMV stock donations and cash donations.
Your AGI in 2022 was $120,000. You donated 30% of your AGI in stock (FMV value at $36,000), and 40% in cash ($48,000). Following the order of operations in any given year, you apply 40% cash deduction first, then you are only left with 10% of your AGI limit for stock deductions (or $12,000). As such, you are left with $24,000 stock deductions to carryover into the next year.
In 2023, your AGI increases to $130,000. You donate 20% of your AGI in stock (FMV value at $26,000), and 20% in cash (also $26,000). Following the order of operations, you will deduct the carrovers as follows:
Cash Deductions this year, 2023 = $26,000 or 20% of AGI
Stock Deductions this year, 2023 = $26,000 or 20% of AGI
Cash Deductions carryover from last year, 2022 = $0
Stock Deductions carryover last year, 2022 = $24,000, or 18.46% of 2023’s AGI
Following the order of operations, you apply the current year's deductions first: $26,000 for cash (20% of AGI), then $26,000 for stock (20% of AGI). This leaves 10% in deductions for 2022 carryovers, or $13,000 in stock from the previous year. You are left with $11,000 to further carryover into 2024.
In 2024, you make no charitable contributions, but you are still itemizing your deductions. You can apply the remaining $11,000 in deductions to complete the process.
If you do end up having carryovers, this can get really complicated to manage on your own as the IRS worksheets are not very intuitive and DIY services like TurboTax and H&R Block are not going to be able to help you very much. You may very well want to consult a tax advisor if you are navigating carryovers over the course of multiple years and assets types.
Notes:
There are many other types of assets you can donate to charity and claim deductions, including art, real estate, cryptocurrency, life insurance policies, and more. But for the purpose of this post, we stuck to the most common forms of donations: cash and securities.
Again, the AGI guidelines in this post apply solely for 50% limit organizations. 501(c)(3) orgs fall under this category. If you are making donations to non-eligible charities (such as a family foundation) the rules change. You can explore those limits on your own in the IRS 526 publication.
Disclaimer:
The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.