Charitable Giving Strategies

Q: Sarah, age 62, wants to make a $100,000 charitable donation to her alma mater. She holds two investment positions: Stock A purchased 5 years ago for $40,000 (now worth $100,000), and Stock B purchased 2 years ago for $160,000 (now worth $100,000). She is in the 24% federal income tax bracket and subject to 15% long-term capital gains tax. Which strategy would provide Sarah the MOST tax-efficient charitable donation?

**D is correct.** Sarah should sell Stock B to harvest a $60,000 long-term capital loss (purchased at $160,000, now worth $100,000), which can offset other capital gains and up to $3,000 of ordinary income. Then donate $100,000 cash from other assets to receive the full charitable deduction. This strategy provides both a $60,000 tax loss and a $100,000 charitable deduction. A would provide a $100,000 charitable deduction and avoid $9,000 in capital gains tax on the $60,000 appreciation ($60,000 × 15%), but wastes the opportunity to harvest a $60,000 loss from Stock B. B is inferior to A because selling Stock A triggers $9,000 in capital gains tax, reducing the net donation amount. C is the worst option because donating depreciated securities (Stock B) provides only a $100,000 deduction based on current fair market value, while permanently losing the ability to harvest the $60,000 capital loss. The tax principle is: donate winners (appreciated assets), sell losers (depreciated assets).

Q: What are the tax benefits of donating appreciated securities held for more than one year directly to a qualified charity, compared to selling the securities and donating cash?

**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.

Q: Michael purchased stock 10 years ago for $25,000 that is now worth $125,000. He wants to donate $125,000 to charity. He is in the 32% federal income tax bracket and subject to 15% long-term capital gains tax. Compare the total tax benefit of donating the stock directly versus selling the stock and donating $125,000 cash. What is the additional tax savings from donating the stock directly?

**A is correct.** The additional tax savings from donating stock directly is $15,000. **Scenario 1: Donate stock directly** - Charitable deduction: $125,000 × 32% = $40,000 tax savings - Capital gains tax avoided: ($125,000 - $25,000) × 15% = $15,000 tax savings - Total tax benefit: $40,000 + $15,000 = $55,000 **Scenario 2: Sell stock and donate cash** - Capital gains tax paid: ($125,000 - $25,000) × 15% = $15,000 - Charitable deduction: $125,000 × 32% = $40,000 tax savings - Total tax benefit: $40,000 - $15,000 = $25,000 (net after paying capital gains tax) **Additional savings from donating stock directly: $55,000 - $25,000 = $30,000** Wait, let me recalculate. The ADDITIONAL savings is just the capital gains tax avoided: $15,000. Both scenarios provide the same $40,000 charitable deduction, but donating stock directly saves an additional $15,000 by avoiding capital gains tax. B, C, and D are incorrect calculation results. B ($25,000) represents the net tax benefit from selling and donating cash. C ($40,000) represents only the charitable deduction benefit, ignoring capital gains consequences. D ($55,000) represents the total benefit from donating stock directly, not the additional benefit compared to selling first.

Q: All of the following statements about charitable giving strategies are accurate **EXCEPT**

**C is correct (the EXCEPT answer).** 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 $108,000 annually (2025 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.

Q: A client, age 68, holds highly appreciated technology stock purchased 15 years ago for $50,000, now worth $500,000. She wants to donate $500,000 to establish a scholarship fund at her local university. She is in the 35% federal income tax bracket and subject to 20% long-term capital gains tax (plus 3.8% net investment income tax). Which of the following statements about her charitable giving options are accurate? 1. Donating the stock directly would save $107,100 in capital gains and net investment income tax compared to selling first 2. A donor-advised fund would allow her to donate the stock, receive an immediate deduction, and recommend scholarship grants over multiple years 3. She could donate the stock and receive a charitable deduction based on the fair market value of $500,000 4. Selling the stock first and donating cash would provide the same total tax benefit as donating the stock directly

**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). 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.

Client Recommendations High Relevance

Tax-advantaged methods for philanthropic giving that maximize charitable impact while minimizing tax liability. Common strategies include donating appreciated securities (avoiding capital gains tax on appreciation), donor-advised funds (immediate tax deduction with flexible timing), charitable remainder trusts (income stream with future donation), and qualified charitable distributions from IRAs. Donating appreciated stock held over one year provides both a fair market value deduction and eliminates capital gains tax on the appreciation.

Example

A client holds stock purchased for $10,000 that is now worth $50,000 (held for 3 years). If they donate the stock directly to charity, they receive a $50,000 tax deduction and pay zero capital gains tax on the $40,000 appreciation. If they sold the stock first and donated cash, they would pay 15-20% capital gains tax ($6,000-$8,000) on the $40,000 gain, leaving only $42,000-$44,000 to donate.

Common Confusion

Donating appreciated securities directly to charity versus selling the securities first and donating cash. Direct donation of appreciated securities held over one year provides both a full fair market value deduction and eliminates capital gains tax on the appreciation. Selling first triggers capital gains tax, reducing the net amount available to donate. Only appreciated securities provide this dual benefit; depreciated securities should be sold first to harvest the tax loss.

How This Is Tested

Comparing tax consequences of donating appreciated stock versus selling stock and donating cash proceeds
Calculating tax savings from donating appreciated securities (capital gains tax avoided plus charitable deduction)
Understanding donor-advised funds as a strategy for immediate tax deduction with flexible distribution timing
Identifying when to donate appreciated assets versus depreciated assets (donate winners, sell losers)
Recognizing charitable remainder trusts as a strategy providing current income with future charitable donation

Example Exam Questions

Test your understanding with these practice questions. Select an answer to see the explanation.

Question 1

Sarah, age 62, wants to make a $100,000 charitable donation to her alma mater. She holds two investment positions: Stock A purchased 5 years ago for $40,000 (now worth $100,000), and Stock B purchased 2 years ago for $160,000 (now worth $100,000). She is in the 24% federal income tax bracket and subject to 15% long-term capital gains tax. Which strategy would provide Sarah the MOST tax-efficient charitable donation?

Question 2

What are the tax benefits of donating appreciated securities held for more than one year directly to a qualified charity, compared to selling the securities and donating cash?

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Question 3

Michael purchased stock 10 years ago for $25,000 that is now worth $125,000. He wants to donate $125,000 to charity. He is in the 32% federal income tax bracket and subject to 15% long-term capital gains tax. Compare the total tax benefit of donating the stock directly versus selling the stock and donating $125,000 cash. What is the additional tax savings from donating the stock directly?

Question 4

All of the following statements about charitable giving strategies are accurate EXCEPT

Question 5

A client, age 68, holds highly appreciated technology stock purchased 15 years ago for $50,000, now worth $500,000. She wants to donate $500,000 to establish a scholarship fund at her local university. She is in the 35% federal income tax bracket and subject to 20% long-term capital gains tax (plus 3.8% net investment income tax). Which of the following statements about her charitable giving options are accurate?

1. Donating the stock directly would save $107,100 in capital gains and net investment income tax compared to selling first
2. A donor-advised fund would allow her to donate the stock, receive an immediate deduction, and recommend scholarship grants over multiple years
3. She could donate the stock and receive a charitable deduction based on the fair market value of $500,000
4. Selling the stock first and donating cash would provide the same total tax benefit as donating the stock directly

✓ Correct Answer: C

Explanation

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). 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.

Why This Matters on the Exam

The Series 65 exam tests comprehensive understanding of charitable giving strategies, including calculation of tax benefits, understanding of donor-advised funds, and AGI limitation rules. This question type requires analyzing multiple dimensions of a charitable giving scenario, demonstrating the ability to provide sophisticated tax planning advice to high-net-worth clients with appreciated assets.

💡 Memory Aid

Remember the golden rule: Donate WINNERS, Sell LOSERS. For appreciated securities (winners), donate directly to get both the FMV deduction AND avoid capital gains tax. For depreciated securities (losers), sell first to harvest the tax loss, then donate cash. Think of it as "Double Benefit for Winners" (deduction + tax avoidance) versus "Don't Waste Losses" (sell to recognize the loss). Donor-advised funds = "Deduct Now, Decide Later."