Allison Dubreuil, Wealthway Financial Advisors: We did want to talk about gifting tonight, not so much in the aspect of buying on Amazon. But if you want to gift financially, how might you go about doing that? And we’ll also try to talk a little bit about charitable giving. This is a good time of year where I think people are thinking about some needs that they may want to support. Trying to find a worthy cause that’s near and dear to their heart and probably want to know the best tax saving strategy or the best efficient way to do that from a financial perspective. We will give you some tips and hints.
Kevin Zywna, Wealthway Financial: The year-end tends to be the time of giving. We certainly see it across our client base. For those clients and other people who are charitably inclined, now’s the time. We see a spike in giving. Although, as we’ve been advised, charities will happily take your donations over the course of the year. But this time, people usually turn their attention to making their year-end gifts. There are some ways that you can do it the most tax efficiently.
Allison Dubreuil, Wealthway Financial Advisors: Let’s start with gifting to friends, family, non-charities. If you are looking to just make a financial gift to a friend or loved one, the first question we usually get is what are the tax consequences? Is this person the recipient of the gift going to have to pay tax? Am I going to have to pay tax? How do I avoid tax? So, it’s a big misconception that there are tax consequences when giving a financial gift to someone. Anyone can give up to $16,000 a year to anyone. So, you can give $16,000 per year to any person. And there are no tax consequences to you. There are no tax consequences to the recipient. It’s like it never happened. And hopefully they don’t waste it all on the lottery.
Kevin Zywna, Wealthway Financial: And they put the money to good use. Yes. So, each person can give $16,000 to any other person without any tax consequences whatsoever to the giver or to the receiver. And this $16,000 number tends to migrate up over time. A little bit with inflation, it’s set by Congress and then administered to the IRS. Right now, we’re at $16,000. Overtime, that will tend to increase a little bit each year.
Allison Dubreuil, Wealthway Financial Advisors: Right. And so that’s a pretty generous gift. I’m sure many people would be happy to get that. But what if you’re thinking you want to give a bigger gift? Maybe you’re trying to help your child or grandchild purchase a home and you want to give a down payment? Or you’re looking to help with college education, or some more significant gifting, giving more than the $16,000 annual limit to a person does not mean you are necessarily going to trigger any tax consequences for yourself, or the recipient. It just means that you have to keep track of it going forward. So, all of us, under current tax law, which this is subject to change, and it does change every so often. But under current tax law, each of us can give away $12 million, it’s a little over $12 million and change during our lifetime and at death. Without any tax consequences. It’s not until you gift or give over $12 million during your lifetime, or at your death, that you would then be subject to taxation. So, if you are wanting to give a gift that’s bigger than the annual $16,000 limit, you just need to make sure your tax preparer is aware and there is an extra tax filing that you would have to do when you file.
Kevin Zywna, Wealthway Financial: And with the high lifetime limit currently of $12 million. That probably only affects less than 1% of the population that would ever even come close to approaching that limit. So, for all intents and purposes, you can give away a heck of a lot of money without any tax implications. You do just have some recording limits, recording requirements, if you give more than $16,000 to an individual in any given year.
Allison Dubreuil, Wealthway Financial Advisors: And there are ways that you can get creative if you’re coming up against that dollar limit. You can, if it’s for tuition, or medical expenses, those two things can be paid directly to the provider. So, you could pay for education, you can pay directly to the university for your child or grandchild …
Kevin Zywna, Wealthway Financial: …neighbor, friend, cousin, niece, nephew.
Allison Dubreuil, Wealthway Financial Advisors: Right? Or medical bills. You could pay the service provider directly. And there’s no limit whatsoever and no tracking. So, you’re allowed to freely pay for everyone’s education and medical expenses. Hopefully that helped makes everybody feel better.
Kevin Zywna, Wealthway Financial: And another strategy is, let’s say you want to give one of your children money for a down payment for a house, like Alison was talking about. Well dad can give $16,000 to child. Mom can give $16,000 to child. So that’s a total of $32,000. And if you do it at the year end, then beginning January one, you can do the same thing for another combined $32,000. So, in a relatively short amount of time, that’s $64,000 that you can give without any gift tax implications if you time it up right.
Allison Dubreuil, Wealthway Financial Advisors: So, there’s a lot of flexibility. And if there’s one takeaway there are most likely not going to be tax consequences to you or to the recipient when making a cash gift. But there are other ways you can make a financial gift we can get more creative than just giving cash although I’m sure no one would want to turn down a cash gift. But if you are really wanting to fund education for a future generation, you may consider instead of giving them cash, you may consider making a 529 contribution. So, a 529 plan is a college savings account. And in Virginia when you make a contribution to a college savings account, if you are the owner of that account, you can get a state tax deduction of up to $4,000 a year. So you’d get a tax deduction for the contribution that went in. And then the funds grow tax deferred. Hopefully it’s invested and it’s growing over the years. And then when it comes time to use the funds for education, you do have to use them for qualified higher education expenses, which is pretty broad can be college, it can be trade school, can be room and board, and supplies and equipment, but if used properly, it comes out tax free, and the earnings are tax free. So, it’s a great way to fund education for loved ones.
Kevin Zywna, Wealthway Financial: Yes. So, if we take the case of say, Grandma wants to give a gift to her granddaughter to fund her granddaughter’s 529 plan that is typically owned by mom or dad, then grandma writes the check to the 529 plan, giving the gift to the granddaughter, and the owner of the plan. Typically, mom or dad gets up to $4,000 Virginia state tax deduction. So, it’s almost like a double gift. Gifting to the grandchild for education and reducing the Virginia taxable income of the child.
Allison Dubreuil, Wealthway Financial Advisors: In fact, the gift would probably be more exciting to the parent than the child.
Kevin Zywna, Wealthway Financial: Well, instead of this train set, right, giving you some free room and board, right? Eventually, one semester at college of your choice.
Allison Dubreuil, Wealthway Financial Advisors: Eventually they’ll appreciate it. So that’s one way to be creative about gifting instead of just giving cash.
Kevin Zywna, Wealthway Financial: Okay, go out to Chesapeake right now and speak with Christopher, who’s been waiting patiently online. Good evening, Christopher you’re on Dollars & Common Sense.
Caller: Yes, you jog the memory for me. Regarding charitable caution, while actually it’s a mix of charitable contributions and gifts. So somewhere along the line, I’ve read that if you happen to be gifting to a beneficiary, on your estate, you need to keep track of that, because somewhere along the line, those previous gifts, let’s say, I give a gift to my daughter. Overtime, I may give a couple of gifts to her. And when the time comes to settle the estate, that those series of gifts are considered to come out of the estate at some point for crediting purpose now realize that $12 million way up in the stratosphere for most of us, but is this something I should keep track of over time?
Allison Dubreuil, Wealthway Financial Advisors: Great question, Chris. Because there’s gifting during lifetime and then what happens with your estate at death. So first, to clear the air, if it’s under that $16,000 per year limit per person. It’s not tracked at all. You do not have to keep track of it. It’s when a gift is higher than the annual limit of $16,000 that it has to be tracked and it will count towards that 12 million lifetime cap that encompasses everything during your lifetime and at your death.
Caller: That’s an interesting little blind spot in the tax code then.
Kevin Zywna, Wealthway Financial: Yes, a technicality. But it’s not going to have any actual tax implications unless you’ve gifted and bequeathed through the inheritance over $12 million to one person.
Allison Dubreuil, Wealthway Financial Advisors: There’s more technicalities, it gets really technical at death. But if you’re not anywhere near 12 million, then you probably don’t have to worry about it.
Caller: Well, hopefully I’m also nowhere near at death. But in my instructions to survivors, I want to make sure that if there’s any weird little loopholes like this, I need to make sure they understand the instructions, so they don’t run afoul of the IRS.
Separate comment, charitable contributions. I’ve had pretty good luck in donating stock directly to a charitable organization, sometimes they need a little bit of coaching as to what to do when they receive it. But the interesting thing is, is transfers at full value. I guess, getting pretty good at this charitable stuff.
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Allison Dubreuil, Wealthway Financial Advisors: Yes. So, gifting appreciated shares of investments can be a really good strategy. Especially if you happen to have an investment where you have a huge pent up capital gain. Maybe you’ve owned it for a really long time, or maybe you don’t even know what your cost basis is, which happens to a lot of us.
Caller: I can speak to that, because I’ve had some shares that I invested for some future college expenses. Those things were sold at their pure appreciation right now and I kept good records. But I probably have to go back with my excel spreadsheet and go back and tally up all the capital gains and distributions all the way back to eternity to figure out what the basis is.
Allison Dubreuil, Wealthway Financial Advisors: Right. So, if you are charitably inclined and you are going to give a gift, then you would want to consider gifting those shares first. Because that will solve your problem. And, like you said, it transfers at the fair market value, the charity can then sell it and they don’t have to pay tax on the gains. So, everybody wins.
Kevin Zywna, Wealthway Financial: That problem goes away. And you get the full deduction from the value of the stock on the day that’s transferred.
Caller: I may solve my bookkeeping problem by simply starting June 8.
Allison Dubreuil, Wealthway Financial Advisors: Yes, good idea.
Kevin Zywna, Wealthway Financial: Alright, thanks for the call, Chris, really good points. We appreciate it. We’re going to remain out in Chesapeake now and speak with Kathy. Good evening, Kathy. You’re on Dollars & Common Sense.
Caller: Hi, good evening, everyone. Thank you for taking my call. And I just wanted to clarify, I turned on my car, when you were talking about cash gifts to children. And I have an adult child who ran into some hard times, laid off during COVID. I ended up paying many of his routine medical expenses. And I could have sworn I heard you say that those payments directly to the provider could have been used as a gift, which would be a tax deduction for us. Did I hear that right?
Allison Dubreuil, Wealthway Financial Advisors: Well, kind of yes and no. Did you make payments directly to the medical provider on behalf of your son, Kathy, or your adult child?
Caller: Yes, right. He was 23.
Allison Dubreuil, Wealthway Financial Advisors: Okay. So the good news is that if you make a payment directly to a medical care provider on behalf of someone else, it doesn’t count as a gift. There are no limits and no tax consequences to you or to him. So that’s really the positive. But unfortunately, there’s no deduction for gifting to people you only get a deduction if you gift to a charitable organization.
Kevin Zywna, Wealthway Financial: Typically a 501C3 properly registered charitable organization.
Caller: Thank you for clarifying that because that’s what I thought. I knew and understood and how it is you turn on your car, get half of the comment. I thank you for your time.
Kevin Zywna, Wealthway Financial: Sure. Okay, Kathy, thanks for the call. We appreciate that.
Allison Dubreuil, Wealthway Financial Advisors: Yes, so we were talking about gifting cash and other creative ways to help people out if you are looking to give a meaningful gift that includes like Kathy said, making medical payments on behalf of others making education payments on behalf of others you can contribute to 529 plans. I’ll throw a plug out there for maybe making IRA contributions for your kids and grandkids.
Kevin Zywna, Wealthway Financial: Kids who have ordinary income or earned income all jobs that they would claim on a on a tax return or had an internship. All those start out their first job but they don’t have enough cash flow to actually make the contributions to the IRA themselves. That’s a great gift that you can give to your young adult children to help get them started. They’re on a path to a secure retirement and get them interested in long term investing at the same time.
Right now, tonight we’re talking about gifting and charitable donations and how to do so as tax efficiently as appropriate. Get the maximum bang for your buck.
Allison Dubreuil, Wealthway Financial Advisors: So far, we’ve been talking about gifting to people, friends, family, colleagues, we could do that.
Allison Dubreuil, Wealthway Financial Advisors: Okay. But I want to shift gears now and talk about charitable giving. This is the season you might be bombarded with requests from every charity known to man. And you might be deciding on which charitable donations to make. So that’s something you want to do thoughtfully. Want to make sure that you’re giving to a cause that is meaningful to you and that hopefully your donation can make an impact. There are ways to vet your charity. There are great websites, there’s one called Guide Star. That is where you can go to look up the ins and outs of your charity and make sure that it is doing what it says it’s doing.
Also, another option is to use a community foundation. So, we have one of the largest community foundations in the country. Hampton Roads Community Foundation is a great resource to go to because they vet all of the local charities and they really know where the need is if you’re trying to target a specific need, like hunger or education or anything. They can help you guide your dollars. They can be a vehicle to help get your dollars where it can make the most impact.
Kevin Zywna, Wealthway Financial: Yes, so if you want your money to stay local, have a big impact on the local community. And you want to ensure that it goes to a legitimate, hardworking, service-oriented charity. Then the Hampton Roads Community Foundation is a great place to start.
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Allison Dubreuil, Wealthway Financial Advisors: So, let’s talk about mechanics. How do you get money to a charity if you want to donate? Well, first and foremost is cash is king, I guess you can give cash to a charitable organization, a 501C3 and in return possibly, I say possibly, get a tax deduction because it depends on your personal tax situation. For the most part, other than a very small amount that you can deduct off the top of your taxes, most charitable donations are an itemized deduction, and only about 10% of people itemize at all anymore. So, making regular charitable donations in cash may not give you much of a tax benefit. That’s not saying don’t do it. Of course, you should, if you are charitably inclined, make your donations. But that just might mean there might be a better way to go about it to also get a tax benefit.
Kevin Zywna, Wealthway Financial: You know, with the increase in the standard deduction now only about 10% of taxpayers itemize and deduct anything above that standard deduction. So, for most people, their charitable donations are not going to be tax deductible. But again, that’s no reason not to do it. Before gifting in any form should first flow from the desire to want to give to a charity. To want to help a cause, then secondarily, how can we find the most tax efficient way of doing it? And even if we can’t, for relatively small amounts, it should be done anyway. Because it helps the common good.
Allison Dubreuil, Wealthway Financial Advisors: Right? So, move forward with your charitable donations. Absolutely. But consider these ideas if you want to get the biggest tax benefit. One, we already talked about this today (I think it was Chris earlier who brought it up) you can donate appreciated stock holdings or appreciated investments. So, if you have a stock holding or an investment that has a significant gain in it, if you sold that investment, you would pay capital gains tax on the gain, and then you could give the cash to the charity. But you’re probably not itemizing I’m guessing. And so, you’re not going to get much of a tax benefit, right.
Kevin Zywna, Wealthway Financial: You have to pay tax on the gain. And you don’t get a tax deduction unless it’s a really high donation. So that’s not very tax efficient. If you had to cash in some appreciated equity stocks, mutual funds, and then give the cash, there is a better way. It does take some additional administration though, and that’s to gift the shares of the stock or mutual fund or ETF exchange traded fund directly to the charity. And mechanically, it would move from your brokerage account over to an investment account owned by the charity. And then once there, the charity could sell the appreciated shares of stock or mutual fund or ETF and they would not incur any capital gains tax and you would be able to deduct the full amount of the value of the contribution on the day that stock transferred.
Allison Dubreuil, Wealthway Financial Advisors: Yes, there are some technical limits on charitable donations. That’s probably beyond the scope of our discussion tonight. But for the most part, most people can deduct their charitable donations if you itemize. So, consider this if you do not itemize, but you do give to charity, consider bunching your donations. You could not give for a year or two and then in year three, you give for three years. And so that might get you up to a critical mass where you might be able to itemize, and then you would get the tax benefit of making the charitable donation.
Kevin Zywna, Wealthway Financial: Yes, so bunch of up a little bit. If you feel awkward about doing that, maybe depending on if it’s your church, or some other smaller type of charitable institution might want to have just a conversation with the person who accepts the gifts and let them know that this is your plan and you are fully in support of the mission, but you just want to give money a little bit differently.
Allison Dubreuil, Wealthway Financial Advisors: Right, like a pledge.
Kevin Zywna, Wealthway Financial: Good word. Yes, pledge a certain amount over a three year period, but you’re going to get it in all in one year of those three.
Allison Dubreuil, Wealthway Financial Advisors: Right. Another idea is to use what’s called a donor advised fund. So, a donor advised fund is really cool because you can put the money in this fund and when you make the deposit that counts as your charitable donation. This works best with more significant donations, usually, $50,000, $100,000, or, $200,000. So, you put the money in and you get the full deduction up front. So, you would get to take the tax deduction, and then, it remains in the account until you give instructions on the fund to send that to your chosen charity. So, the money could essentially be invested. It could be like its own investment account and be invested for long term growth. So, your $50,000 turns into $60, $70, $80, $90, $100,000. And then you get a big tax deduction up front, but then you make your regular, smaller periodic deductions as you wish.
Kevin Zywna, Wealthway Financial: So, it functions like a mini endowment that you control and own. And you get charitable deductions for the amount going into the donor advised fund. You don’t get it on the way out, you get it on the way in. But then you can give one big donation to the donor advised fund. So, you go over the standard deduction, and you get a significant tax break there. But then you can parcel out small $1,000 – $2,000 little charitable donations that ordinarily would not move the needle on the deductions. And it’s a way of sort of bunching them all at once in a fund that you control. And as Alison said, can be invested for growth long term. So many times, these can be used in perpetuity. You would be the owner, and you could put maybe your adult children on as beneficiary. So, when you pass away, then your adult children can take over ownership of the donor advised fund and it’s a family thing that can be done to help highlight the benefits of giving.
Allison Dubreuil, Wealthway Financial Advisors: Love the idea of getting the whole family involved in choosing the charities and when and how to make donations. I think that is such a cool way to incorporate philanthropy in your family and to teach that to kids. Another reason that that could be a good strategy is if you have a big liquidity event. If you are maybe selling a business or if you’re selling a piece of real estate, rental real estate, not your personal residence because most of that gain would be sheltered. But some sort of big payday, this could help offset a large inflow with giving you a large deduction but still allowing you to take your time with the ultimate charitable donation.
Kevin Zywna, Wealthway Financial: Yes, we’re big fans of donor advised funds for their usage and their flexibility.
Tonight we’re talking about giving and charitable donations and tax efficient ways of doing both.
Allison Dubreuil, Wealthway Financial Advisors: Yes, and we saved one of my favorites for last. The qualified charitable distribution. In a mouthful, QCD is how I like to say it QCDs. If you are age 70 and a half, and you have an IRA, you can make charitable donations directly from your IRA. So, the money has to go from your IRA, directly to a qualified charitable organization 501C3. And when done properly, the money is completely excluded from taxable income. So, if you take money out of an IRA, yourself, and you receive it into your bank account, IRA distributions are taxed as ordinary income. So, this is a way to get money out of an IRA without it adding to your taxable income. It’s essentially a deduction off the top, which is a much more valuable deduction than an itemized deduction, especially because we already said that only about 10% of people even itemize these days.
Kevin Zywna, Wealthway Financial: Right. So, if your giving was not enough to exceed the standard deduction anyway, and you are 70 and a half and owner of an IRA, then you can gift directly from the IRA to the charity. Now, for those who are now 72, and have to take their required minimum distributions, money is going to come out of that IRA, whether you want it or not. That has to happen in every given calendar year, beginning at age 72. A way of preventing that from becoming taxable income is to make charitable donations directly from your IRA, in an amount, at least as high as the required minimum distribution. If you do that, none of it will become taxable, and you have made good donations to charity.
Allison Dubreuil, Wealthway Financial Advisors: Yes, so this makes sense. In most cases, if you’re above the age of 70 and a half, and you have an IRA, and you make charitable donations, it almost (almost I say, because there are no absolutes, always an exception), but it almost always makes sense to do this. Make the donation directly from your IRA. That’s a deduction off the top of your income. And then just use the standard deduction, instead of trying to itemize that is almost always the most tax effective way to make donations for those over age 70 and a half. Now there is a limit. So, you can do up to $100,000 a year as a qualified charitable distribution from an IRA. But that is not usually a problem for many people. So, if you are looking at what to do with your required minimum distribution this year, there’s still time. You can donate it directly to charity, it depends on your custodian, what you have to do to accomplish this. So, they may have their special requirements. You just want to make sure it doesn’t go to your bank account, or it’s going to be taxable income.
Kevin Zywna, Wealthway Financial: Yes, there is some additional administration that you have to set up in advance in order for this to flow smoothly and works smoothly and ensure that you do in fact, not include those distributions, charitable distributions from the IRA in taxable income. In the case of our clients, we have a separate checkbook established for them that is linked to their IRA. And they make charitable deductions directly from their IRA with that special checkbook that that then they give to the charity. And we always say try to make that last donation to the charity by the end of November, because there can be mail issues processing and the check has to clear your IRA by December 31. So, you just want to leave some additional lead time there and know that in order to accomplish this type of gifting, there is some additional administration.
Allison Dubreuil, Wealthway Financial Advisors: Right. You want to make sure you let your tax preparer know. This is a problem that we have now been seeing for a couple of years where tax preparers don’t realize that you’re doing this and it is reported differently on your tax return. So, you want to make sure that you let them know which donations were made directly from an IRA versus which donations were made from your personal cash or other accounts.
The tax forms that are sent by the preparers, the people who hold the IRA, aren’t always detailed enough to capture the amount that went to the charity as opposed to when to you. And so if it’s not detailed on that tax form, then you’ve got to communicate that to your tax preparer. You have to know it, because otherwise, then you’ll end up paying tax on the contributions.
Allison Dubreuil, Wealthway Financial Advisors: Right. And while we’re on the subject of required minimum distributions, just a quick public service announcement, you have until December 30, or 31st to get those out of the IRA or the penalty is hefty. The penalty is 50% of what was supposed to have come out of the IRA would go to the IRS. So don’t miss your required minimum distribution if you are 72 or older. Or if you have an inherited account, that’s also a tricky one. For another day. We don’t have time to tackle the complexities of that.
Kevin Zywna, Wealthway Financial: Yes. So, check with your bank or financial advisor or start doing your homework on required minimum distributions. Because yes, like Allison says, it’s half of what should have come out. Okay, we got time for one more.
Allison Dubreuil, Wealthway Financial Advisors: One more. Oh, okay. So, another idea is a little more end of life planning. If you are interested in giving an impactful gift, but maybe you don’t want to do it just yet. Or you’re kind of unsure how things are going to play out. You could consider naming a charity as a beneficiary on your life insurance policy. If you have life insurance, or your investment account. An IRA is actually a great account to designate to go to charity, if you want to do so because they won’t pay tax on it. Like if you give an IRA at death to a family member, it’s going to be taxable to them, but if it goes to a charity, it would not be taxed. So that’s always a good idea, to make a final gift as a beneficiary designation.
Kevin Zywna, Wealthway Financial: Yes, just as most people put their kids or their spouse on as beneficiaries on an IRA, you can also just name a legitimate charity as a recipient. Then at the settlement of the estate a check will be sent to the charity on your behalf. So also a great way to efficiently give to charity.
Director of Financial Planning