Charitable Giving: Beyond the BasicsSubmitted by Occidental Asset Management, LLC on November 22nd, 2016
We all love to give. It feels great to give to others, whether it is your favorite charity, or as a demonstration of love and support of friends and family members. However, just like any expense, giving should be budgeted, tracked, and done with intention. It is not healthy to give beyond one’s means, to support financial dependence in others, or to give out of a sense of guilt or shame. Time spent in support of people and causes you love can be just as valuable, if not more, than a financial gesture.
With the Holidays quickly approaching, we thought it would be fitting to cover the topic of charitable giving. The last few months of the year make up what is commonly called the Giving Season for the nonprofit community. It's not uncommon as the holidays near, people feel encouraged to give more generously than during the rest of the year.
Charitable giving can be a core and substantial priority in your life and financial plan. Put simply, it feels good to give and to have an impact in our communities. Additionally, having a structure and plan around your charitable contributions can have a financial impact for your family as charitable donations can bolster deductions to reduce your tax liability. We support our clients’ charitable goals and values, and look to find efficient and optimal ways of incorporating those into our planning process.
Let’s cover the basics. If you give money to a qualified organization, you may deduct the contribution from your adjusted gross income (generally up to 50%). For example, if you are in the 33% marginal tax bracket and make a donation of $1000, you will save $330 on taxes. There are many different strategies regarding charitable giving strategies. Here are some basic ones besides just donating your personal items or giving cash.
You can also give intangible personal property such as publicly traded stock (deductible up to 30% of your adjusted gross income, if more can be carried up to 5 years forward). Current long term capital gains tax on a stock when sold is either 15% or 20%. For example, let’s say your yearly goal is to give $20k a year to your church. You happen to own $20k worth of XYZ stock with a $10k long term capital gain built in. If you sell the stock and give the money to the church, you will pay $2k capital gains tax (profit of $10k times 20% if in highest tax bracket) and then get $20k deduction. A better option would be to donate the $20k of stock to the church, thereby also eliminating the $2k of capital gains tax and still taking the $20k deduction. The church would get the $20k worth of stock, most likely liquidate immediately and still get the same benefit as if you gave twenty thousand dollars. If you still think that company is a good investment, you can turn around and buy more which resets your cost basis to the current purchase price.
Donor Advised Fund
A Donor Advised Fund allows you to make an irrevocable charitable contribution to a fund where you get an immediate tax deduction. You can even donate capital appreciated stock into this type of fund as well. The funds can accumulate within the account and invested to grow, which ultimately is a larger amount to your choice of Charity(s). You can then control the timing of the distribution of the fund to various charity organizations. This could be particularly useful in a year where you have a large amount of income you are trying to offset and have an ongoing charitable goal. For example, let’s say John just sold his business for millions of dollars which puts him in the highest tax bracket of 39.6%, but will fall back into a 25% tax bracket next year. He can make a large lump sum contribution to a Donor Advised Fund and receive the immediate tax deduction the year he is in the highest tax bracket. He then can control the timing of distributions to his choice of charitable organization. There could be a variety of large income events where this strategy could be effective (Roth conversions, sudden wealth event, etc).
Required Minimum Distributions
The IRS requires taxpayer to start distributing their IRA’s and tax deferred accounts when they turn age 70 ½. This is called a RMD (required minimum distribution). You can opt to make a QCD (qualified charitable distribution) directly to your choice of a qualified charity and satisfy your RMD. You may be asking why can’t I just take the distribution and then make the donation. If you take a distribution, those funds are added to your AGI (adjusted gross income). If you turn around and then donate that same amount to charity, it reduces your taxable income but does not reduce your AGI. The benefit to doing this directly is that the amount of distribution won’t ever be added to your AGI, therefore avoiding triggers such as paying more in Medicare, taxability of your social security, itemized deduction phase outs, net investment income tax, etc. You can also get the deduction even if you don’t itemize your tax deductions (charitable donations don’t help if taking standard deduction).
These are just a couple basic strategies that can optimize your charitable giving. As you can see, there ways around developing a more effective giving strategy then just writing a check. With any strategy, there are nuances you may want to be aware of and would be best to consult a competent advisor.
Nick Maratta, MBA, CFP®