‘Everyone wins except the IRS' with this legal charitable donation strategy, advisor says

• It's easy to swipe your credit card on Giving Tuesday, but other assets could offer a bigger tax break, experts say.
• You must itemize tax breaks to claim the charitable deduction, which is more difficult with a bigger standard deduction since 2018.
• Typically, it's better to donate profitable investments held in a brokerage account because the transfer bypasses capital gains taxes.

It's easy to swipe your credit card or send a check when donating to charity. But you could score a bigger tax break by gifting another asset.

Some 34 million U.S. adults gave $3.1 billion for Giving Tuesday 2023, up by 0.6% from 2022, according to estimates from GivingTuesday Data Commons.

Profitable stock is "one of the best targets for charitable giving" if the organization can accept it, said certified financial planner Michael Lofley with HBKS Wealth Advisors in Stuart, Florida. He is also a certified public accountant.

"If you donate the stock directly to charity, you don't owe taxes on a sale, and neither does the charity when they sell it," he said. "Everyone wins except the IRS."

When filing taxes, you claim the bigger of the standard deduction or your total itemized deductions. The latter may include charitable gifts, medical expenses, state and local taxes capped at $10,000, and more.

Since 2018, there's been a higher standard deduction, and only about 10% of taxpayers itemized tax breaks on 2021 returns, according to the most recent IRS filing data.

For 2024, the standard deduction is $14,600 for single taxpayers and $29,200 for married couples filing together. Your total itemized deductions must exceed those thresholds to claim the charitable deduction.

Cash gifts are 'not usually the most tax-effective'

"While giving cash is great, it is not usually the most tax-effective method" for donations, according to CFP Mitchell Kraus, owner of Santa Monica, California-based Capital Intelligence Associates, where he specializes in charitable giving.

If you've owned profitable investments in a brokerage account for more than one year, you'll pay long-term capital gains taxes when selling the assets, assessed at 0%, 15% or 20%, depending on your taxable income. Plus, there's a 3.8% investment surcharge for higher earners.

By donating your appreciated assets, you'll avoid capital gains taxes on growth. Generally, you can deduct the market value of the investment, assuming you've owned it for more than one year. Itemizers can claim a deduction capped at 30% of adjusted gross income for public charities.

Consider 'stacking deductions'

With a higher standard deduction, investors often bunch donations of profitable investments, experts say.

Donors may consider "stacking deductions in alternating years," to exceed the yearly standard deduction, said CFP Paul Penke, client portfolio manager and operations director for Ironvine Capital Partners in Omaha, Nebraska. 

One way to achieve that is by opening a so-called donor-advised fund, according to Penke. These investment accounts offer an upfront deduction and flexibility to make future gifts to eligible nonprofits.