Making the Most of Charitable Giving
Joel Dresang: Bryan, one of the benefits of accumulating wealth is having the option of sharing it, and you recently wrote an article about charitable giving and making the most of the money that you give. Let’s talk about that a little bit.
Bryan Becker: That’s right, Joel. I highlighted three different strategies to maximize the amount of your donation, to both minimize the impact on your own pocketbook while still maximizing the amount that you’re donating to those charities of your choice.
Joel: And you wrote about three strategies. There are more than that, but you also point out that it’s something that people should talk with their tax advisors about.
Bryan: That’s right. There’s three different strategies that we highlighted. Obviously there’s more than that. But we took a look at three that are growing in popularity, that help based on the federal tax code and that really do vary with people’s ages, income levels and just their personal situation. Because of that, it’s a great opportunity to kick off a conversation with your tax professional.
Joel: So let’s talk about those three strategies. One of them is the qualified charitable distribution. What is that?
Bryan: A qualified charitable distribution is exactly as it sounds. It’s a distribution from your IRA, and it’s to a qualified charity.
One of the caveats of a qualified charitable distribution is that it’s only eligible to people that are in their required minimum distribution phase. So if you’re age 70½ or older, and the IRS is requiring you to take a distribution, rather than take it, claim it as income and donate some to charity, you can take those securities, send them directly to the charity, and you never need to recognize that income on your tax return.
Joel: They don’t get the charitable distribution as a tax deduction, but it lowers their income. What are their benefits of that?
Bryan: That’s right. There could be even greater benefits to not having to recognize the income.
So, if you don’t recognize the income, fewer of your Social Security benefits will get taxed. You’ve got a lower threshold for taking certain itemized deductions, such as medical expenses. And, for high-income households, you’ll have fewer phase-outs of exemptions and itemized deductions.
Joel: So those are qualified charitable distributions. You also write about gifting appreciated securities. What does that involve?
Bryan: Gifting appreciated securities simply comes from a taxable account. There’s no limit as far as the, the donor’s age. But, you take appreciated securities and rather than sell them, recognize the capital gain, pay capital gains taxes and then try to take the charitable deduction on your tax return, you simply send the securities straight from your brokerage account to that charity.
They get the full benefit of the amount that you donated, and again, you get a full benefit of the charitable deduction. And you avoid the capital gains tax.
Joel: You also write about donor-advised funds. What are those?
Bryan: A donor-advised fund is a type of foundation where you can gift, again, cash or securities, and instead of the donor-advised fund using those monies to benefit charities, they’ll hold on to them in a type of escrow account.
So you don’t own those monies anymore, but you do control them. You get to choose how they’re invested, to whom they get paid, for how much and when. So there still is quite a bit of control that you maintain.
Joel: And we were talking about this before. The donor-advised funds are a good way for families to get involved.
Bryan: That’s right. We see multiple generations of family members both contribute to donor-advised funds as well as help in the decision-making process as to where those funds will be going and over what time period.
Joel: What about the effects of charitable giving on your portfolio balance?
Bryan: Gifting appreciated securities – or when you’re taking a qualified charitable distribution – is a great way to rebalance your portfolio. If you have some equity securities that may have appreciated in value and you’ve gotten outside of your normal risk tolerance, it’s a great way to kind of rebalance, send those equities off to a charity, and bring yourself back into that asset allocation that fits your portfolio best.
Learn more A special Thanksgiving Money Talk Podcast on giving Bigger bang for the charitable buck, by Chris Evers
Joel: As you point out, these are strategies that investors can use as conversation starters with their tax advisors. We’ll have links to more information as well as to your article on our website at Landaas.com as well as through this YouTube channel.
Expressing gratitude, a Money Talk Video with Bob Landaas
Retirement requirement: Distributions, a Money Talk Video with Dave Sandstrom
IRS Publication 526, Charitable Contributions
Charitable Contributions, IRS Tax Topic
(initially posted Nov. 20, 2017)