Philanthropy

Charitable Giving, Part 4: Tax-Smart Ways to Give to Charity (Part 2)

Tax Efficient Giving Strategies

In my last article, I shared a few charitable giving strategies that can help you be your generous self while at the same time being tax smart. In part four of this four-part series, I continue that theme and offer some final thoughts on tax-efficient giving.

Qualified Charitable Distributions

A Qualified Charitable Distributions (QCD) allows IRA owners above age 70 ½ to transfer up to $100,000 directly to charity each year. One of the benefits of donating via a QCD is that you can give to your favorite charity while potentially reducing your taxable income.

In addition, a QCD can satisfy all or part of your required minimum distribution (RMD) once you reach RMD age. This benefit makes it an especially tax-efficient giving strategy for people who have other income sources and don’t necessarily need their RMD.  

Keep in mind that you must satisfy a few key rules for a QCD to be a non-taxable distribution.

Most importantly, the IRS considers the first dollars out of an IRA to be your RMD until you meet your annual requirement. To get the full tax benefit of a QCD, be sure to donate the funds directly from your IRA to charity before making any other withdrawals from your account.

In addition, your IRA custodian will require you to complete and sign a form that details your QCD intention. Then, the custodian will send a check to the charity of your choice.

In some cases, your custodian may allow you to write checks against your IRA. Just be aware that your checks must clear before year-end, so it pays to plan ahead.

Charitable Gift Annuities

A Charitable Gift Annuity is a tax-efficient giving strategy where an individual makes an irrevocable transfer of money or property to a charity. In return, the charity pays the individual a fixed income for the rest of their life or a specific term. The fixed payment amount is based on several factors, including the donor’s age, the donation amount, and current interest rates.

In addition, the donor receives a tax deduction for the initial donation and potential tax-free income from the annuity payments. When the donor dies, the charity retains the remaining assets for its mission.

Here are some things to keep in mind when donating to a Charitable Gift Annuity:

  • The gift is irrevocable.
  • Annuity payments are fixed and don’t adjust for inflation.
  • The annuity payments may be lower than a comparable annuity that is not charitable.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is a “split interest” giving vehicle that allow donors to contribute assets to a trust and receive a partial tax deduction. The trust’s assets are then divided between a non-charitable beneficiary (who receives a potential income stream for a term of years or life) and one or more charitable beneficiaries (who receive the remainder of the assets).

There are two types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Each has its own distribution method.

CRTs have several benefits, including the preservation of highly appreciated assets, income tax deductions, and tax exemption on the trust’s investment income. In addition, you can donate a variety of assets to a CRT, including cash, securities, closely held stock, real estate, and other complex assets.

CRTs can also be established by will to provide for heirs with the remainder going to charities of the donor’s choosing.

Final Thoughts on Tax-Efficient Giving Strategies

Qualified Charitable Distributions, Charitable Gift Annuities, and Charitable Remainder Trusts are all potentially tax-efficient giving strategies that can help you achieve your philanthropic goals. Yet they are also complex and may not be right for everyone.

If you’re considering one of these strategies or are looking for more tax-smart giving ideas, be sure to consult an attorney, tax expert, and/or financial planner to determine which strategies make sense for you. In the meantime, please visit our Resources page for more information on this and other financial planning topics.

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Charitable Giving, Part 3: Tax-Smart Ways to Give to Charity (Part 1)

Tax-Smart Ways to Give to Charity

If you’ve read the first two articles in this blog series, perhaps you’ve put some thought into how much you want to give to charity each year and to whom. In the second half of this series, we’ll discuss tax-smart ways to give to charity. Tax laws can be dense, so bear with me as I explain the strategies as clearly as possible!

The first thing to know about charitable giving and taxes is that you must itemize on Schedule A of Form 1040 to deduct your charitable donations for the year.

Your total itemized deductions must exceed the standard deduction for you to reap the tax benefit of giving to charity. In 2023, the standard deduction is $13,850 for single filers and married couples filing separately, $27,700 for joint filers, and $20,800 for heads of household.

Fortunately, if you typically take the standard deduction and the amount you give to charity each year doesn’t push you over the threshold to itemize, there are strategies you can employ to maximize your tax savings.

To maximize your tax savings, consider the following tax-smart ways to give to charity:

#1: Bunching

Suppose you’re a non-itemizer but get close to the standard deduction because you max out the State and Local Tax (SALT) deduction at $10,000. Then, you may want to consider a strategy referred to as “bunching.”

How Bunching Works

Bunching is a tax-smart way to give to charity where taxpayers combine or “bunch” their charitable donations into one tax year so they can itemize their deductions.  

Suppose a single taxpayer usually gives $3,000 to charity annually. Meanwhile, their other qualifying itemized deductions (such as state and local taxes, mortgage interest, and medical expenses) amount to $10,000 for a total of $13,000 in deductions.

Thus, it would make sense for this taxpayer to take the standard deduction of $13,850 and not itemize. But let’s say instead they give two years of their charitable budget, or $6,000, in one year.

In this case, they would itemize since their total deductions ($16,000) exceed the standard deduction. If this person is in the 24% tax bracket, their tax savings from charitable donations would be $516 for the year.

This strategy or something similar can be repeated over time, creating multi-year tax savings.

#2: Donor-Advised Funds as a Tax-Smart Way to Give to Charity

In the above example, we assumed the taxpayer wrote a total of $6,000 in checks and mailed them to their preferred charities in one year. Then, they skipped donating to charity in year two.

But there are other tax-smart ways to give to charity that can be even more financially advantageous than bunching and allow for giving each year. One example is to utilize a donor-advised fund (DAF).  

How DAFs Work

A DAF is a registered 501(c)(3) organization that can accept cash donations, appreciated securities, and other non-cash assets. Thus, if you hold highly appreciated securities in a taxable investment account, you may benefit greatly from donating to a DAF.

Here’s why. Suppose instead of writing checks for $6,000 to various charities, the same taxpayer in the example above transfers $12,000 worth of Apple (AAPL) stock with a cost basis of $35/share into a DAF. The stock is worth $160/share on the day of the donation.

The taxpayer can take a tax deduction of $12,000 (the current market value of the shares they donate) on that year’s tax return. They also avoid paying the capital gains taxes they would have incurred by selling the stock outright. This amounts to a savings of over $1,400 ($9,375 gain x 15% long-term capital gains tax rate).

Once they donate their shares to a DAF, the fund sponsor can sell the shares tax-free. The taxpayer can then invest the proceeds within the DAF and let the funds grow tax-free over time. In addition, they can designate which charities they want to receive grants from the DAF going forward.

Like bunching, donating to a DAF allows you to take a potentially large tax deduction in the year you make the donation. Yet unlike bunching, you don’t have to decide which charities to donate to right away. Instead, you can donate your $3,000 as planned each year from funds in your DAF.

Key Advantages of DAFs

  • Flexibility: Donors can recommend distributions to multiple charities over time without having to manage individual grants to each organization.
  • Tax benefits: Donors can claim an immediate tax deduction for the full amount of their donation, subject to certain limitations.
  • Investment management: DAFs typically offer a range of investment options and professional management services to help grow the value of the donations.
  • Privacy: Donors can choose to remain anonymous when making recommendations for grants, if desired.
  • Legacy: DAFs can provide a way for donors to involve their family in philanthropy and pass down charitable values and traditions to future generations.

Limitations of DAFs

Keep in mind that DAFs are not free. According to a 2021 study by National Philanthropic Trust, the average total fee for DAFs was 0.96% of assets per year. This fee includes administrative fees, investment management fees, and any other fees the DAF provider charges.

In addition, DAFs come with a number of rules, including minimum balance requirements, minimum grant requirements, deadlines, and grant approvals.

Many DAF providers require a minimum initial contribution ranging from $1,000 to as much as $25,000. Once you establish the fund, there’s typically a minimum balance requirement between $5,000 and $25,000. If you fail to meet these minimums, the provider may change additional fees or penalties.

In addition, some DAF providers may have minimum grant requirements ranging from $50 to $250 or more. And because most people actively grant at the end of the year, there may be deadlines for making grants to ensure timely processing.

Lastly, DAF providers must approve grants before disbursement to ensure the recipient is an eligible charitable organization and that the grant doesn’t violate IRS rules or regulations. However, disapproval of a grant is rare.

Despite these limitations, the potential benefits make DAFs a tax-smart way to give to charity worth considering in many cases.

Popular DAF Providers

While there are many donor-advised funds (DAFs) in the United States, the most popular providers tend to be large financial institutions and nonprofit organizations. Examples include:

  1. Fidelity Charitable: Fidelity Charitable is the largest DAF provider in the US, with over $35 billion in assets and more than 200,000 donor-advised funds.
  2. Schwab Charitable: Schwab Charitable is the second-largest DAF provider in the US, with over $20 billion in assets and more than 180,000 donor-advised funds.
  3. Vanguard Charitable: Vanguard Charitable is a DAF provider affiliated with the investment firm Vanguard, with over $14 billion in assets and more than 80,000 donor-advised funds.
  4. National Philanthropic Trust: National Philanthropic Trust is a nonprofit organization that offers DAFs and other philanthropic services, with over $8 billion in assets and more than 18,000 donor-advised funds.
  5. Silicon Valley Community Foundation: Silicon Valley Community Foundation is a community foundation that offers DAFs and other charitable services to donors in the Silicon Valley region and beyond, with over $13 billion in assets and more than 4,000 donor-advised funds.
  6. DonorsTrust: DonorsTrust is a nonprofit organization that offers DAFs and other philanthropic services to donors who prioritize limited government, personal responsibility, and free enterprise.

It’s worth noting that there are many other DAF providers in the US, and your choice of provider will depend on your specific philanthropic goals and financial situation. You must do your due diligence to understand the fees, rules, and requirements if you’re considering this tax-smart way to give to charity.

Next: Tax-Smart Ways to Give to Charity Part 2

Hopefully you now have a better understanding of why bunching and DAFs can be tax-smart ways to give to charity. In the final article of this blog series, I’ll share a few more giving strategies that can help you maximize your impact and tax savings.

In the meantime, please visit our Resources page for more information on this topic and beyond.

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Charitable Giving, Part 2: Which Charitable Organizations Should You Donate To?

Which Charitable Organizations to Donate To

This article is part two in a four-part blog series focused on charitable giving and will address the question: Which charitable organizations should you donate to?

Once you’ve decided how much money to give to charity each year, you can focus on the recipients. According to Giving USA Foundation, the types of charities that tend to receive the most donations are:

  • Religious organizations
  • Educational institutions
  • Human services such as food banks, disaster relief organizations, and homeless shelters
  • Health-related charities such as hospitals and medical research centers
  • Arts and culture charities such as museums, orchestras, or theatre groups

Many people tend to respond to end-of-year donation solicitations they receive by email or mail and give to the same organizations every year. But if you want to be more proactive about your giving, spend some time thinking about the issues or causes you care about and find the organizations that impact those issues or causes most.

Smaller organizations may have a greater need for your dollars than larger organizations. As such, you may want to take advantage of opportunities to give to local organizations, such as theatre or educational groups.

For example, I donate to a local organization called Foodwise, whose mission is “to grow thriving communities through the power and joy of local food.” Not only do I admire their mission, but I was also previously a board member and get a lot of pleasure from attending their events.

Another example is a client of mine who donates to a swim club she belongs to that’s organized as a 501(c)(3) organization. The swim club was renovating its clubhouse, so she donated dollars specifically to help get this project completed. Another client gives to a hiking club because she’s an avid hiker. 

A Word About 501(c)(3) Organizations When Deciding Which Charitable Organizations to Donate To

Suppose you’re eligible for tax deductions for charitable giving. (Ordinally, you must itemize deductions on Schedule A of your Federal Tax return to receive a tax benefit.) In that case, you should ensure that the organization you donate to is a 501(c)(3) organization.

A 501(c)(3) organization is a tax-exempt nonprofit in the U.S. that must operate exclusively for religious, charitable, scientific, literary, or educational purposes. It addition, the organization must not engage in political or lobbying activities or provide private benefits to any individual or group.

It’s also important to note that if you contribute money through crowdfunding platforms such as GoFundMe, Kickstarter, or Indiegogo, these donations are typically not tax deductible. That’s because the individual fundraising campaigns aren’t tax-exempt organizations. 

Investigating the Charitable Organizations You Donate To

There are several ways to investigate charities to ensure they’re using your charitable donations properly.

One well known charity evaluation organization is Charity Navigator, which provides ratings and financial information on thousands of nonprofits and assigns a rating based on their performance.

Another is GuideStar, which allows you to search for nonprofits by location, mission, or types of work. 

How Many Organizations Should You Donate To?

Lastly, many clients ask me if it’s better to give a large amount of money to one organization or spread their donations among several organizations. I’ve found that this is a personal decision.

Some people care about so many things that they want to spread their money widely. Meanwhile, others prefer to have a more significant impact on just a couple of organizations.

One thing I know for sure: try and give at times other than just the end of the year. The charities will appreciate it, plus you won’t get that anxious feeling that you haven’t done enough on December 31. In addition, if you write checks or take advantage of Qualified Charitable Distributions (QCDs), you’re more likely to meet the deadline to get a tax deduction in the year you donate.

Next: Giving Strategically

The first half of this blog series has focused on how much to give and which organizations to donate to. In part three, we’re going to explore various ways to give strategically, so you can make more of an impact with your donations while enjoying the associated tax benefits.

In the meantime, please visit our resources page for additional details on this topic, and stay tuned for more.

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A Great Alternative to Grocery Stores: Farmer’s Markets

My anxiety level spikes at the thought of going to a grocery store. The lines are long, and once inside, it’s like playing bumper carts with your fellow shoppers all scrambling to keep out of each other’s way. I’m so grateful to the workers who are cashiering and bagging groceries, but I worry about them at the same time.

Photo Courtesy of CUESA

A great alternative and one I highly recommend is shopping at your local farmer’s market.

You will be outside in fresh air;
You will buy produce harvested the day before;
You will find sustainably raised meat, fish, and eggs and fresh cheese;
You will most likely find freshly baked bread and good coffee;
You will be buying from small farmers and other independent food businesses who need your support.

I guarantee you’ll feel energized and happy after spending an hour or two in a farmer’s market community.

PRECAUTIONS TO KEEP YOU SAFE

Photo Courtesy of CUESA

Farmers and other vendors are taking precautions to keep you safe by offering bagged fruits and vegetables, selecting items for you, maintaining lines, and encouraging the use of apps, or credit cards instead of cash. Some are offering curbside pickup of pre-packed boxes. The farmers market at the Ferry Plaza farmers market in San Francisco run by CUESA – The Center for Urban Education For Sustainable Agriculture, has curated a “best of the market” box that you can purchase on-line and then drive-by to pick up. I bought it last Saturday, and I’ve been enjoying the bounty all week.

If you live in the San Francisco Bay Area and would like to be notified about the CUESA Farmers Market Box availability sign up here. You can also order from the individual farms that sell at the market here.

If you don’t live nearby, here is an excellent directory of farmer’s markets nationwide. And lastly, if you aren’t convinced yet, the CUESA staff wrote an excellent article about why farmer’s markets are essential for our health and well being.

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A Little Year End Tax Planning with Your Holiday Punch

HD-200911-r-pomegranate-punchOr,  8 Year End Tax-Related Deadlines and Things to Think About

With the busyness of the holiday season, it’s easy to forget about things like tax planning. After all, we’d rather focus on having fun with our friends and family! However, there isn’t much you can do to improve your tax situation after December 31st for 2015, so now is the time to do a little planning so as not to miss out on tax-saving or retirement saving opportunities and avoid penalties. (After all, the IRS has ways of knowing who has been naughty!).

1. Roth IRA Conversions: There were income limitations on converting regular IRA’s to Roth IRA’s, but no longer, now anyone can convert IRA’s to Roth’s as long as they are able and willing to pay the tax on the conversion. Why would you want to do this? Because converting to a Roth IRA will guarantee you will owe no income tax on the funds if withdrawn during retirement because you pay the tax now. For example, if your income dropped in 2015 due to a job change, you might consider converting some of your IRA to a Roth because you will be in a lower tax bracket and pay less taxes than you might in future years. The deadline for conversions is December 31, 2015, but you will want to do this by at least December 22nd to make sure the paperwork gets processed with your custodian.

2. Establishing a New Qualified Retirement Plan:  If you are self-employed and want to establish a qualified plan such as a 401(k), money purchase, profit-sharing or defined benefit plan, it must be set up by December 31st. Many people confuse this deadline with the SEP IRA deadline that can go into the next year, including extensions.

3. Max Out Qualified Plan contributions. If you contribute to a 401(k) or 403(b) at work and have not contributed the maximum and are able to, talk to your payroll department to increase your contribution before December 31st. For those under 50, the maximum contribution is $18,000 and for those over 50, the maximum contribution is $24,000. At the very least, try to contribute up to any employer match.

4. Take RMD’s (Required Minimum Distributions) on retirement accounts if you have reached age 70 ½. The minimum distribution rules apply to traditional IRA’s, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. If you don’t take the distributions or don’t take enough out, you may have to pay a 50% excise tax on the amount not distributed as required.

5. Take MRD’s From Inherited IRAs. If you have inherited an IRA from someone other than a spouse, you must take minimum required distributions beginning in the year after the year of death of the original owner and by December 31st of that year. To calculate the MRD, the IRS has a Single Life Expectancy table and each year you would subtract one year from the initial life expectancy factor. Fortunately, there are on-line calculators to help you do this!

6. Review Your Charitable Contributions. If you itemize deductions and are charitably minded, you will want to donate what you plan to before December 31st . You may deduct an amount up to 50% of your adjusted gross income, but 20% and 30% limitations apply in some cases. Good to know: donations made by check are considered delivered on the day you mailed it.

7. Donate Highly Appreciated Assets To Charity. Any long-term appreciated securities, such as stocks, bonds or mutual funds may be donated to a public charity and a tax deduction taken for the full fair market value of the securities up to 30% of the donor’s adjusted gross income. In addition to the tax deduction, the donor avoids any capital gains taxes. Probably the easiest way to do this is to set up a donor-advised fund –it’s like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they’re ready.

8. Do Some Tax-Loss Harvesting. This is the practice of selling a security that has experienced a loss. By selling the security and taking the loss, an investor can offset taxes on capital gains or up to $3000 on ordinary income. The sold security can be replaced by a similar one, maintaining the optimal asset allocation and expected returns. When doing this, watch out for the wash-sale rule: your loss is disallowed if, within the period beginning 30 days before the date of the loss sale and ending 30 days after that date, you acquire a substantially identical security.

And, don’t forget to take a sip of that punch!

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Short List for your Finances 2014

listThere are many actions you can take to improve your finances, and that’s sometimes the problem. I have compiled a short list of ideas that can make a real difference in your financial health. Copy and paste this short list into Evernote or other list-making software or  print it out and tape it to your fridge. Then check off the items as you complete them and celebrate with your favorite indulgence – mine would be a piece of high-quality chocolate or a glass of Pinot Noir!

1. Write Down Your Financial Goals. We all know that writing things down makes them more real. Just having ideas floating  around in our heads  doesn’t cut it. Quantified goals are more likely to be achieved, so be as specific as possible as to deadlines and numbers.  For example, “I want to increase my net income by 20% in 2014 through a combination of decreasing expenses and adding new clients,”or “I want to reduce my spending on dining out from $500 to $300 per month.”  Next, you can make a plan to tackle your specific goals.

2. Make a Plan to Tackle Your Goals.
 Big goals can seem less daunting if you break them down into action steps. Take your list of goals and write down a simple plan of action for each. For example, taking the first goal above, an action item could be to review all business expenses from 2013 and determine whether they are 1. necessary 2. you could find a cheaper alternative, or 3. you could get away with spending less. Make a commitment to tackle the action steps by scheduling them into your calendar. 

3. Review Your Retirement Saving Strategy.  Most of us are saving on a regular basis to a retirement plan through our employer or through a self-employed retirement plan, but not all of us are saving as much as we could. Review your current payroll deductions into your 401(k) or your IRA contributions and see if you can increase the contribution amount to this year’s limits. Time is as important as the amount of money you save – it pays to start earlier than later.

If you are contributing to a Roth IRA, congratulations! – you have taken advantage of an excellent retirement savings vehicle. If you follow all the rules, you will only pay tax on the money invested once – before you contribute to the Roth. After that, your contribution and earnings can grow tax free for years.

4. Call your Insurance Agent. If you have been paying your insurance premiums for auto, home, and liability coverage on automatic, take the time to call your insurance agent or shop your insurance to feel confident you’re getting the best deal and your coverage is adequate for your current life situation. You might be surprised to find out that you have been overpaying or are underinsured.

5. Make a Charitable Giving Plan. Giving to needy or inspiring causes is a wonderful thing – the act of giving uplifts us and benefits the recipient. It  can also have excellent tax advantages, so it pays to know the different ways to give. For example, a great way to donate to a charity is to use a Donor Advised Fund (DAF). DAF’s can be funded using appreciated securities rather than cash, the securities are then sold within the fund to avoid the capital gains tax. The tax deduction is taken in the year when the account is funded avoiding ongoing record-keeping.

6. Understand Your Parent’s Finances. As uncomfortable as it may seem, it’s really important to talk to your parents about their financial planning so you know where they stand financially now and when they die. Questions to get answers to:  Do they have a plan to pay for possible long term care expenses? Have they created wills and trusts so that their estate is distributed with the least amount of costs and hassle? Do they have Durable Powers of Attorney set up for healthcare and finances? Knowing the answers to these questions before your parents grow too old will reduce stress later and possibly save dollars.

I’ll stop now and give you a chance to get started on your short list! If you enjoyed this post and found it useful, please let me know by commenting, tweeting it, or posting it on LinkedIn, Facebook, or Pinterest and I will plan to write similar posts in the future.

 

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