What is Charitable Giving Strategies?

D is correct. Sarah should donate the appreciated Stock A directly and sell the depreciated Stock B. Donating Stock A gives her a $100,000 fair market value deduction (if she itemizes, subject to the 30% of AGI limit for appreciated property) and avoids capital gains tax on its $60,000 gain ($60,000 × 15% = $9,000). Selling Stock B realizes a $60,000 long-term capital loss that can offset other capital gains and up to $3,000 of ordinary income a year, with any excess carried forward.

A captures the deduction and avoids the $9,000 tax, but it stops there and leaves the loss on Stock B unrealized. B is inferior to A because selling Stock A triggers $9,000 in capital gains tax, reducing the amount left to donate. C is the worst option because donating depreciated Stock B gives a deduction of only its $100,000 current value while permanently forfeiting the $60,000 capital loss. The tax principle is: donate winners (appreciated assets), sell losers (depreciated assets).

B is correct. Donating appreciated securities held for more than one year (long-term capital assets) to a qualified charity provides two tax benefits: (1) a charitable deduction based on the full fair market value of the securities, and (2) complete avoidance of capital gains tax on the appreciation. This makes it significantly more tax-efficient than selling the securities first and donating cash.

A is incorrect because the charitable deduction is based on fair market value, not cost basis, when donating appreciated long-term capital assets to public charities. The full appreciated value is deductible. C is incorrect because one of the key benefits of donating appreciated securities directly is that capital gains tax is completely avoided. No capital gains tax is owed on the appreciation when securities are donated rather than sold. D is incorrect because it reverses the tax treatment. When you donate appreciated securities directly, you do not pay capital gains tax on the appreciation; that is one of the two primary tax benefits along with the fair market value deduction.

A is correct. Both strategies produce the same $125,000 charitable deduction, worth $125,000 × 32% = $40,000. The only difference is the capital gains tax.

Donate the stock directly: no sale, so no capital gains tax. Net tax benefit: $40,000.

Sell, then donate cash: capital gains tax of ($125,000 - $25,000) × 15% = $15,000. Net tax benefit: $40,000 - $15,000 = $25,000.

Additional savings from donating the stock: $40,000 - $25,000 = $15,000, which is exactly the capital gains tax avoided.

B ($25,000) is the net benefit of selling and donating cash, not the difference. C ($40,000) is the value of the deduction alone, which both strategies share. D ($55,000) counts the avoided $15,000 as a benefit on top of the $40,000 deduction; it is a cost avoided, so it shows up only as the difference between the two strategies.

C is correct (the exception). Depreciated securities should not be donated directly to charity. When you donate depreciated securities, the charitable deduction is limited to the current (lower) fair market value, and you permanently lose the ability to recognize the capital loss. The tax-efficient strategy is to sell depreciated securities first to harvest the capital loss (which can offset other gains and up to $3,000 of ordinary income), then donate cash. The principle is: donate winners (appreciated securities), sell losers (depreciated securities).

A is accurate: Donor-advised funds allow donors to make a charitable contribution, receive an immediate tax deduction in the year of contribution, and then recommend grants to specific charities over time. This separates the timing of the tax deduction from the distribution to charities. B is accurate: Charitable remainder trusts (CRTs) provide the donor or other beneficiaries with income payments for life or a term of years, with the remaining trust assets going to designated charities. This strategy provides current income, a partial current tax deduction, and future charitable impact. D is accurate: Qualified charitable distributions (QCDs) allow IRA owners age 70½ or older to transfer up to $111,000 annually (2026 limit, indexed for inflation) directly from their IRA to qualified charities. QCDs count toward RMD requirements but are excluded from taxable income, providing tax benefits for charitably inclined retirees.

C is correct. Statements 1, 2, and 3 are accurate.

Statement 1 is true: By donating the stock directly, she avoids capital gains tax and net investment income tax on the $450,000 appreciation ($500,000 current value - $50,000 cost basis). Tax avoided: $450,000 × (20% + 3.8%) = $450,000 × 23.8% = $107,100. This substantial tax savings is a primary benefit of donating appreciated securities.

Statement 2 is true: A donor-advised fund (DAF) is an ideal vehicle for this situation. She can contribute the appreciated stock to the DAF, receive an immediate tax deduction, avoid capital gains tax, and then recommend grants to fund scholarships at the university over multiple years. DAFs provide flexibility in timing distributions while securing the immediate tax benefit.

Statement 3 is true: She would receive a charitable deduction based on the full $500,000 fair market value of the stock (not just the $50,000 cost basis), usable up to 30% of AGI a year for appreciated property, with a five-year carryforward. When donating appreciated long-term capital assets to qualified charities, the deduction is based on fair market value, providing a significant tax benefit.

Statement 4 is false: Selling the stock first would trigger $107,100 in capital gains and net investment income tax (as calculated in Statement 1), significantly reducing the total tax benefit. While both strategies provide the same charitable deduction, donating stock directly provides the additional benefit of avoiding $107,100 in capital gains taxes. Selling first would leave her with only $392,900 after tax to donate ($500,000 - $107,100), unless she donated $500,000 from other sources.