Hosted by Kevin J. Zywna, CFP®
Tonight, we’re going to talk about tax efficient, charitable giving. A lot of people donate to charities in some form or another whether that be a local church or synagogue or animal shelter, or maybe even artistic venue, playhouse, that type of thing. And a lot of times, donations are bunched towards the end of the year. And now that we are out of the summer season, tension starts to turn towards end of year planning for this and other particular items. So I thought I’d talk a little bit about some more tax efficient ways to give to charities. Now everyone knows that you can write a check or put cash in the basket or nowadays Venmo or PayPal directly to a charity. And that’s good, you know, any type of giving is good for the charity, but where you can do good for yourself at the same time, doesn’t hurt does it? And so tonight we have some more creative ideas on how to gift more tax efficiently to charity.
#1 Donate Appreciated Non-Cash Assets Instead Of Cash
Kevin Zywna, Wealthway Financial Advisors: Number one, donate appreciated non-cash assets instead of cash. So what’s a noncash asset? Well shares of stock or shares of a mutual fund or shares of an exchange traded fund. So by donating appreciated, publicly traded securities or real estate can count as well. And other non-cash assets that are held more than one year means that as a donor, you can generally eliminate the capital gains tax that you would otherwise incur if you sold the assets and then donated the sale proceeds. You donate the shares of the stock or the mutual fund directly to a charity and nowadays, this is actually one of the best and one of the easiest ways to take full advantage of appreciated stock so you don’t sell the shares, create the cash incur the capital gain and donate the cash and get the deduction. What you do is you give the appreciated shares and that cost basis, the lower cost basis on the shares, transfers to the charity. So you never have to sell. And you never have to realize a capital gain, and you never have to pay capital gains tax on it. The charity receives it, they’re a protected 501 C three organization that’s tax exempt. They sell it for its current market value and never have to pay the capital gains tax. You get to deduct the total value of the amount that you donate the total market value on the day of the donation of those shares. And when you itemize, if you can itemize, then you receive a charitable deduction for the fair market value of the assets. And I guess I should acknowledge here for a lot of listeners. Current itemized current standard deduction for married filing joint is 27,700 for this calendar year, for individuals or single tax filers, $13,850. So you’re going to have to have itemized deductions above those thresholds before you can start deducting but people who make large charitable contributions easily meet those thresholds. So just something to keep in mind here. Donating appreciated shares of a stock or a mutual fund or ETF without selling them directly to a charity. A lot of charities are becoming more sophisticated. They have the form set up to do this. Contact your favorite church or charity or synagogue and see if they will accept appreciated shares of stock or publicly traded securities.
#2 Combine Tax Loss Harvesting With A Cash Gift
Kevin Zywna, Wealthway Financial Advisors: Another strategy – combine tax loss harvesting with a cash gift. So what is tax loss harvesting? Well, for those of you who do your own investment management, you probably know or have heard of tax loss harvesting. Tax loss harvesting is when you purposely and intentionally sell an investment at a loss in order to realize a capital loss that then can be used to offset capital gains somewhere else. And then you typically repurchase after 30 days, the same investment or something similar to it, so that you can gain in future appreciation as well. But tax loss harvesting, purposely taking or realizing a loss on securities in order to offset future gains, and donors who itemize their deductions can then claim a charitable deduction for donating cash from the sale of the proceeds.
So using those tax loss harvested to then go ahead, take the loss, write that off, and also itemize and deduct the charitable contribution. Give private business interests. So for you, executives, entrepreneurs, small business owners, who may own interests and say a C Corp, limited partnership, Limited Liability Company and LLC, you can donate shares of those entities as well. And it’s especially true if the interests have been held more than one year. They’ve appreciated significantly over time and retain more value than say other assets that you would be considering. So maybe your small, medium sized private business is growing faster than say the general stock market at large. That’s an excellent opportunity to potentially gift some appreciated shares. And the same sort of concept applies because you’ll have to sell them and realize the capital gain, you can donate them directly to charity. They sell them and then receive the proceeds tax free. So this eliminates that long term capital gains tax that you would otherwise incur. Plus you can claim that charitable deduction for the fair market value of the assets.
Now, if it’s not a publicly traded company, then most likely you would probably need to have an appraisal done on the value of the business. This can be accomplished by a CPA. Typically, larger CPA firms are set up to give a qualified appraisal on the estimated value of your closely held C Corp Limited Partnership LLC that type of thing. So it might be a little bit more effort involved. But for people who have those closely held interests and want to make a big, impactful charitable contribution, then giving portions of private business interest is an excellent way to do that.
Kevin Zywna, Wealthway Financial Advisors
We’re talking about tax efficient charitable giving. Everyone knows how to stroke a check, go to a website, put in a credit card, donate directly to a charity. But there are more creative ways to donate than just that. And if there are ways that you can lower your tax bill, maximize your deductions, and lower your tax bill, then by all means, you should take it. Do good for yourself while doing good for others. All right. Now another thing, this doesn’t apply to too many people, but I find it interesting, contribute restricted stock.
#3 Donate Restricted Stock
Now, there aren’t too many people who own restricted stock, probably especially in Hampton Roads. But restricted stock is something that you receive when a large company goes public. And they have an initial public offering that you see the bell getting wrung on Wall Street, you know, and in the morning, there’s usually some company there that’s just gone public. Which means they’ve converted their private shares to public form and are distributing them to the public through brokerage houses, and on stock exchanges. Well, a lot of times when that occurs, the initial founders, initial investors and current executives of the newly publicly traded company often receives chunks, fairly large chunks of very valuable shares of stock in the company, that has just gone public. But I don’t know if it’s all the time, but certainly most, I think it might be an SEC requirement. A lot of times when that happens, there’s restrictions on the sale of that stock by those executives. The day they ring that bell and that company trades publicly, they can’t turn around and sell the shares that they received. Those special insiders have restrictions on their ownership of the shares. And usually, you have to wait like say six months, or sometimes a year or longer before those executives and original investors can turn around and sell those shares. So if you have restricted stock, then at some point in time, the restriction gets lifted. And so when that restriction gets removed, the stock can be donated to and then sold by a charity. A donation of restricted stock allows a donor to generally eliminate that long term capital gains tax on the appreciation and claim a charitable deduction for the total value of the stock on the day that’s donated, if you itemize. So same concept is of some of the other things I talked about in the first segment of the show, but able to do it with restricted stock. If you’re one of the few lucky owners or holders of restricted stock of a large publicly traded company.
#4 Bunch Up Multiple Years Of Charitable Contributions Into One Tax Year
Here’s one that everyone can take advantage of – bunch up multiple years of charitable contributions into one tax year. So say you give weekly to your church, or annually to the SPCA. Instead of just doing it in one count a year, add up all the contributions you do in a year. Multiply it by two, or three, and do it all in one tax year. I assure you, the charity is very happy to receive one big lump sum, that accounts for the next two, three, or four years of what you would have donated and spread out over that period of time. So by bunching them all together in one year, then you’re much more likely to get over that standard deduction threshold, to be able to itemize. And then take a deduction that you might not otherwise qualify for, if you spread it out into small little pieces over the course of several years. So bunching your contribution is something that’s really simple and easy. Of course, you have to have the cash or the appreciated stock up front in order to be able to do that. But if you’re somebody who knows you’re committed to the cause, and want to make a bigger impact in one particular year, then this is a great way of doing that for the charity. As well as, most likely, either getting you a tax deduction that you otherwise wouldn’t qualify for, or getting you a larger tax deduction in that one calendar year.
#5 Rebalance Your Investment Portfolio Annually & Donate Appreciated Assets
Here’s another one for the people who do their own investment management. If you do your own investment management, rebalance your investment portfolio. Which you should do about annually, probably don’t need to do it more frequently than that. We used to in the industry think that either monthly or quarterly rebalancing was preferred. Studies have shown that too much rebalancing too frequently can be counterproductive and actually lower your long run rate of return. But I digress here.
So usually about annually is good for rebalancing on your portfolio. And for those who don’t know what that is, rebalancing your portfolio is once you build an investment portfolio, typically, if you’ve done it right, then you invest in various asset classes or different categories of investments in your portfolio. And over time, some of those asset classes do better than others. And they then drift away from that original target that you built in your portfolio. So it’s appropriate to rebalance, sell some of those winners that have done better, and buy some of those underperforming asset classes that have been laggards. And yes, that’s right selling those that have done well and buying those that have done poorly. That forces you to sell high and buy low a little bit over time. And that’s exactly what you’re supposed to do. And that’s exactly how you boost your long run rates of return all right rebalancing.
But it can come at a cost, especially in taxable accounts. Because whenever you sell those winners, you are realizing capital gains and capital gains are taxed for most people at a rate of 15% of the profit. For really high income earners, it can be up to 20%. And for low income people, it can be as low as zero. It’s a pretty wide berth. Most people are going to be in the 15% capital gains rate so you can rebalance your portfolio, realize the capital gains on the outperforming assets.
Go ahead and take the proceeds by the underperforming asset classes or investments as you should and then donate. So you’re claiming the itemized deduction for donating the long term. You take those appreciated assets and go ahead and donate them in an amount that offsets the capital gains tax on selling the appreciated assets. Now that takes a lot of you got to put pen to paper on that one or have some spreadsheets or some computer power behind you in order to kind of do the math on all this. But if you’re up to the task, then it’s a way of sort of offsetting the taxable costs that come with rebalancing the portfolio as well as doing good if you’re charitably inclined, as well.
Kevin Zywna, Wealthway Financial Advisors: Tonight we are talking about efficient ways to give to charity tax efficient ways to give to charity. Everyone knows you can donate cash, you can put a few bucks in the Salvation Army pot around Christmas time, you can write a check, you can donate online with your credit card. And those are all good because at least you’re donating to charity and doing some good with your money. But if you can do good for yourself, then you should do that as well. So we’re talking about some creative ways in which you can lower your tax bill while you’re giving to charities.
#6 Make A Charitable Donation That Offsets Tax Liability For A Roth Conversion
So another one I got here is really a timing issue offset the tax liability on converting a retirement account to a Roth IRA. So for those of you who are contemplating Roth conversions, which is the idea of taking money from a traditional IRA, and then converting it into a Roth IRA.
Roth IRAs having tax advantages, such as tax deferred growth, and tax free withdrawals from the account in retirement age after age 59 and a half. Also, you do not have to do required minimum distributions on Roth IRAs. So they have some strong tax advantages. But if you haven’t continued to in the past or you have small bounces, you can convert your traditional IRA to a Roth.
Now know this, that is a taxable event. There is no free lunch, getting the money from a traditional IRA into a Roth whatever comes out of that traditional IRA or 401K for that matter, TSP or your company sponsored retirement plan. The money that comes out and gets converted to the Roth comes out as ordinary income. So we do the math on these conversions for our clients. And I’ve got to say, the conversion aspect tends to be very nippy, there’s usually only certain specific set of circumstances where it makes good viable financial sense to go ahead and pay the tax on the withdrawal from the traditional IRA, and then take the proceeds and put it into a Roth.
But where it does make sense, and if you are going to make that type of transaction, and you are charitably inclined, then a good strategy would be to make a donation to charity of a significant nature, in the amount large enough to offset the income that is going to be claimed, by cashing out that traditional IRA and converting it to the Roth. Because that is going to be a big taxable event to get it from that left, traditional pocket to the right, Roth pocket. Once in the Roth safe and sound not going to be taxed on the growth not going to be taxed on the withdrawals don’t have to take the RMD.
But the transfer of the money between those is a taxable event. So if you can offset it with a large charitable donation, in the same year that you do that conversion, then you can save yourself some big tax dollars. Number one, offset the tax liability on a retirement account withdrawal. So that’s kind of similar. You have to take the required minimum distributions for so it was some people have just beginning at age 72. That year is creeping up every year now. So it’s going to be 73, then eventually going to be 75. But people, at least 72 are taking the required minimum distributions. Those are taxable events when distributed.
Same idea applies, you can make a large charitable donation if you itemize and offset the amount of the ordinary income that comes out of the IRA due to the required minimum distribution, save yourself some tax money that way.
#7 Leave A Legacy By Naming A Charity As A Beneficiary
Here’s a good one that is pretty easy to do, and doesn’t really cost much of anything. Leave a legacy by naming a charity as a beneficiary of your IRA. So a lot of people know they can name individuals, as beneficiaries on your company retirement plan, on your IRAs, sometimes on your bank accounts, if you set it up properly. Many people usually name their spouse as the primary beneficiary and their kids as contingent beneficiaries. But you can also name charities as beneficiaries on those types of accounts as well. At your passing, the money will go tax free directly to the charity of your choosing. And I would also add relatively quickly and relatively simply, as well. So every penny of the donation can be directed to support the charity to the charitable goals. Beyond an individual’s lifetime, if you name a charity as a beneficiary, and like I said, it doesn’t cost anything to just put a charity name put the United Way Hampton Roads or Hampton Roads Community Foundation, as a beneficiary of your charity.
And it can be a partial beneficiary, it doesn’t have to be 100%. Quite frequently people have multiple beneficiaries on their IRAs. So say you have three kids, maybe you do 25%, to each kids and 25% to a charity as well, too, that’s near and dear to your heart. And it’s a great way of donating fairly large amounts of proceeds to charitable charities. And sometimes, if you let them know in advance that you have done this, which they deeply appreciate, there can be some donor rights or some naming rights maybe to buildings or activities that the charity does, if that’s important to you. You can attach your name to a large gift as well by naming a charity as a beneficiary on your IRA.
#8 Establish A Charitable Trust – Charitable Remainder Trust & Charitable Lead Trust Options
Another tax efficient charitable gifting strategy is to establish a charitable trust. Now this gets more complicated and usually requires the help of an attorney. And there are multiple forms of charitable trusts. I’ll just stick to one or two of the more common kinds of charitable remainder trust is a form of giving vehicle and irrevocable giving vehicle that usually funded with a gift of cash, or non-cash assets like shares of appreciate shares of a mutual fund or ETF that we talked about earlier. And then you assign beneficiaries to the trust, and they receive income payments from the Trust for a term of years. It’s usually like at least 10 years, sometimes 20, or a person’s lifetime, they receive income from the trust. And then a public qualified charity can receive the remaining assets at the end of the term. So the donor claimed a charitable deduction if they itemize in the year the trust is funded, obviously, during your lifetime. And then the deduction amount is typically based on the present value of the assets that will eventually go to the named charity. And the charity is large enough and enduring and has an element of permanence to it, they are more than content to wait 10, 20, 30 years, if the payout is going to be large enough.
So a charitable remainder trust, a way of getting a current tax deduction today, receiving income from that trust in order to support and enhance your lifestyle while you’re alive. And then transferring the proceeds at your death, typically in a substantial amount that has grown over time through good investments to the charity in one big lump sum, and everybody’s happy. So a charitable remainder trust is a fairly common vehicle that will almost certainly require the help of an attorney and a few thousand dollars of setup fees. And then a little bit of ongoing administration and maintenance as well on a yearly basis. And it’s sister type of trust, a charitable lead trust. So charitable remainder trust, the charity gets what’s left over, what remains in the trust after a person’s death. A charitable lead trust, that’s the opposite. Money goes into the trust, the charity receives income over a set period of time, 10, 20, 30 years or up until somebody’s death, and then beneficiaries of the trust, then typically one’s kids or perhaps grandkids can receive an inheritance of the remainder of the trust or what’s leftover, after that period of time. So charitable lead trust, kind of a sister component in the charity trust department.
Tonight we’re talking about tax efficient, charitable giving, I probably had about eight or nine different recommendations, more creative strategies for how to give to charities, beyond just writing a check or putting cash in the bucket, or putting a credit card into a charities website. Some more creative ways to donate and especially if you want to make larger, more impactful gifts, than just 100 bucks here 100 bucks there, then a lot of these strategies would apply for you high income earners and people willing to make impactful donations to charities.
How To Research A Charity
So like we talked about earlier, these need to be properly qualified, registered, typically 501 C 3, that refers to a tax code that qualifies them 501 C 3 charities, you can look this information up, and I believe you’re going to enforce me off top my head, I think it’s called GuideStar, a place where these filings are publicly available. And you can get a wealth of information through this amalgamation of information to ensure that number one, it is a 501 C 3, it is properly registered with the IRS. And approximately how much of the money actually goes to the cause that you want to support. And that’s a big one, anyone can sort of open up a charity, but how much of the money actually gets to the cause? That’s always a point of contention, especially with big donors, they want you know, the big bucks to go to the cause. They don’t want it to be eaten up by administrative fees, large staffs, extravagant benefits, and so traveling expensive. Obviously, the people who work for charities deserve to be compensated fairly, but maybe not a new wardrobe.
#9 Establish A Donor Advised Fund
I’ve got two more I want to get to before we wrap up the show. These are two that we use very frequently in our practice. One is a donor advised fund, as that you can use as a component of any of the previous strategies I talked about before. So a donor advised fund is actually a public charity that you set up and usually gets set up with a qualified custodian. So that’s usually a bank or a brokerage company like Schwab, or Fidelity, or Vanguard or something like that. And then once you set up this account with the qualified custodian, and you contribute cash or the appreciated noncash assets, like we talked about before, shares of stock, mutual fund, ETF, and if you itemize then the contributed assets can be invested for potential tax free growth inside the donor advised fund. And then once they’re in the fund, the donors can recommend grants out of the fund to other public charities of their choice at any time.
Donor advised fund accounts can also be a charitable beneficiary of IRA assets. So you can name your own donor advised fund which you control. You can appoint other people to help you sort of administer the donor advised fund. And as such as your kids say, to help get them in the spirit of charitable giving, and then through that donor advised fund, you get the tax deduction when you contribute into the donor advised fund. Once the money is in there, then you can invest it for future growth, so that it can endure in perpetuity, if you manage it appropriately. So you get the donation, you get the tax deduction in the year which you make donations to your donor advised fund. Now, when you make donations to other public charities through the fund, you don’t get a deduction then because you already got it for the contribution. But this is a way of lumping all big donations into one year.
If you do not have a particular charity that is near and dear to your heart, but you know, in some form or fashion, you are charitably inclined at some day, at some point, in some fashion you do want to give, then a donor advised fund is a great catch all to start the charitable process and get a large tax deduction for your contributions to it. And once set up, it depends on the custodian, but typically they’re fairly easy to administer. A lot of it’s done on websites nowadays, it’s almost like doing a bill pay or typing out a check online or something like that. And the custodian will send the money directly to the charity.
#10 Set-Up a Non-Taxable Qualified Charitable Distribution From You IRA
And then the last one I want to talk about is that you can satisfy your IRA required minimum distribution through a nontaxable qualified charitable distribution. A lot of big words in that one, what does that mean? It’s simple once it gets set up and operational. For those of you who must take required minimum distributions, so beginning age 70, and a half for people nowadays. Anything that comes out as a distribution, whether it’s required or not, from your IRA comes out as ordinary income which is taxed at the highest income tax rates. But if, instead of receiving your required minimum distribution, you can make a qualified charitable distribution directly to a charity from your IRA, to satisfy the amount that would have had to come out from a required minimum distribution. Usually, you need a special checkbook in order to do that. You write a check right out of your IRA, like you would a bank account. You give it to the charity. That amount, then, never shows up as ordinary income on your income tax filing. So it’s not a deduction, it’s actually better if you do the math. It’s never recognized as income and therefore lowers your overall tax bill, instead of you taking the money out of the account, claiming it as income and then getting a deduction for the charity. So qualified charitable distributions, one of the great ways to make tax efficient, charitable giving.