Reduce Taxes with Charitable Giving

Speaker 1 (00:00):

Stop giving to charities in cash. What I mean is there are better ways to give to the charities that you care about that provide even more tax benefits. Gifting shares of appreciated securities using qualified charitable distributions or Q CDs, bunching your donations and contributing to donor advised funds are just four ways you can give to charities and reduce your taxes.

Speaker 1 (00:32):

Welcome everyone. This is episode 29 of The Retirement Power Hour. I'm your host, Joe Allaria. And as I mentioned today, we're going to be talking about better ways to give to charities. A lot of times I see clients who are supporting charities that they care about and they're giving to those charities in cash, which again, it's not a bad thing, but there are other ways to give to charities that are gonna give you more tax benefits. And I haven't met too many people who wanna pay more taxes than they need to. So today we're going to get into that. All these different ways are at least four strategies that you may be able to use to give to charities and reduce your taxes at the same time. But first, before I get into it, don't forget to go to retirement power hour podcast.com because if you have a question that you'd like to submit to us or if you'd like to schedule an introductory call, just go to retirement power hour podcast.com and you can click the tab, work with me and schedule an introductory call with me and we'll have a conversation to see if we can help you and to see what you need help with.

Speaker 1 (01:39):

Okay, before we get into our four strategies today, I wanna remind you, or at least mention that these strategies are designed to help people primarily who are already giving to charities. So if you're someone who isn't giving to charities, I've often explained this to, to clients, starting to give to charity is not going to bring you ahead financially. Because if you think about it, when you give to charity, what we hope will happen is if you give a hundred dollars, then you're gonna be taxed on a hundred less dollars. And when you're taxed on a hundred less dollars, let's say your marginal tax bracket's 22%, that means you're gonna save $22, but you still gave a hundred dollars away. So your net behind $78 in that example. So if you're just trying to save on taxes and you're not giving to charity today, this video not for you, what I've found is a lot of people are giving that $100 or whatever amount, and they're not getting any benefits for it at all.

Speaker 1 (02:38):

So this video is designed to help people out there who are already giving to charity, or they're committed to continue to give to charity, and they want to get the most out of their charitable gifts. With that, let's talk about the first strategy for charitable giving and reducing your taxes. And that is gifting appreciated shares of securities. This could be stocks, this could be mutual funds. And what I mean by this is if you own securities in a non IRA account could be an individual account, a brokerage account, a trust account, and you've owned some stock or some mutual funds that have grown or appreciated in value, and you have what are called unrealized capital gains on those positions. Instead of gifting cash to a charity, what you can do with charities as long as they can receive securities, and that's just if they have an account themselves.

Speaker 1 (03:35):

If they have an account that can receive securities at a Charles Schwab for example, they can receive securities as long as they have their account set up, but you can gift shares of those investments. And what that does is that eliminates the unrealized capital gain that you had on that position. So I wanna give you an example of this and because I think it's very beneficial and it can help you avoid capital gains tax. So for example, let's say a donor wants to give $20,000 to a local charity, and that donor has $20,000 of Apple stock. And on that Apple stock, they only bought the stock for 10,000. So they have $10,000 of unrealized gains. Now, normally the donor would have to pay 15 to 20% capital gains tax when they sold that Apple stock, and that could be at some point in the future, it could be today.

Speaker 1 (04:29):

So by gifting all of their shares of the Apple stock, they're going to avoid 1500 to $2,000 in eventual capital gains tax. The donor can then take the $20,000 that they plan to give originally, and they can just go back and buy that same Apple stock. That's just, if someone says, look, I want to give to this charity, but I don't want my brokerage accounts to be depleted. I have the cash I want to give to the charity. Instead of taking your cash and giving to the charity, take your appreciated shares of stock, give those to the charity, take your cash, put it back in your account. You can buy the exact same security if you really wanted to, and that will help you avoid capital gains tax. So that is the first strategy. Gifting appreciated shares. Let's talk about the second strategy and that is qualified charitable distributions.

Speaker 1 (05:25):

Now, the thing about both of these first two strategies, they are what I call one year strategies. They're gonna help you this year and for a qualified charitable distribution or A-Q-C-D-A-Q-C-D, what a QCD is is when you have money in an IRA and you take the money out of an IRA, but instead of like some retirees do, they take the money out of their IRA, they put it in their checking account, and then they write a check to their charity of choice. Instead of doing that, A QCD is taking the money straight from the IRA and putting it straight into their charity or giving it straight to their charity. Now, almost all charities, I don't know of any that can't accept gifts this way because they're just going to receive a check straight from your IRA. Now, a couple things you wanna be aware of.

Speaker 1 (06:21):

If you think you would be a good candidate for A QCD first, you have to be at least 70 and a half to do a qualified charitable distribution. If you are under 70 and a half, you cannot use this strategy. Second, if you are in that RMD phase required minimum distribution phase, meaning you have to take a certain amount of money out of your IRAs each year, you can actually use a QCD to satisfy your RMD. So if your RMD is $20,000 and you do a $20,000 QCD, you can actually satisfy your RMD. And guess how much tax are you gonna pay on the amount that you give to to the charity? Nothing. You're right, you're gonna pay zero tax on the amount that you do in A QCD that's gonna go to a charity. It's not coming to you. So you're not gonna pay income tax, but you will satisfy your required minimum distribution.

Speaker 1 (07:18):

And one reason this is so impactful is a QCD is not an itemized deduction. So to understand charitable giving and when people actually get benefits for giving to charity, you sort of need to understand itemized deductions versus a standard deduction. And it's very difficult for people in today's day and age to itemize their deductions because due to the Tax Cuts and Jobs Act of 2017, the standard deduction amounts have gone up quite a bit, and most people don't even know that this is the case. Most people give to charity and think that they're getting credit for those gifts they give to charity, they get a letter from from their charity or their church at the end of the year, they give it to their accountant or tax prepare, and they assume, I'm getting credit for these gifts. But the truth is, what probably happens for most people is they give all of their charitable donations and those records to their tax prepare, and most people cannot use those itemized deductions because the standard deduction number is so much higher.

Speaker 1 (08:28):

And for example, in 2024, the standard deduction amount for married couples is $29,200. For an individual, it's $14,600. Now you'll get an extra $1,550 if you are over 65 or blind and up to $1,950 if you're over 65 or blind or unmarried, and you're not a surviving spouse. So that's over $30,000 if you're a married couple, over 65, close to 30,000 if you're a married couple and under 65, a lot of people don't have that many itemized deductions. So kind of stepping back a little bit, if you're not surpassing the standard deduction with regular charitable gifts, you're not getting any credit for those charitable gifts. So going back to the qualified charitable distribution, this deduction happens before you get to the standard versus itemized deduction section of your tax return. So if you took a hundred thousand dollars out of your IRA, but 20 went to A QCD, your tax prepare is gonna record $80,000, that went out to you as a distribution, not a hundred.

Speaker 1 (09:36):

Then after that, you get your standard deduction or itemized deductions. So most people will lower their income with A QCD and then get a full standard deduction after that. Let me give you an example. So you know how this works. Let's say a donor is 72, she needed to withdraw $40,000 from her IRA. She planned to give $10,000 to charities for the year. So without a QCD, she's gonna take $40,000 out of her IRA, she's gonna pay tax on the whole amount. Then she's going to write a check for $10,000 with a QCD, she's gonna send 10,000 from the IRA directly to the charity, and then she's only gonna get taxed on the remaining $30,000. So again, if she is paying 20% roughly on that, then she would save $2,000 in taxes on the year by using A QCD. So we've talked about two strategies that you can use, give to charities and reduce your taxes.

Speaker 1 (10:37):

The third is simply bunching your donations. What do I mean by that? Well, instead of giving a set amount of donations each year, every year, whatever the amount may be, you might say to yourself, because of what we talked about just before about itemized deductions and standard deductions, you know, if I give even $10,000 a year to charity, but when I add up all my other itemized deductions, it's not enough to surpass that standard deduction. I might say to myself, geez, I still wanna give 10,000 per year, but what if I give 10,000 throughout the whole year and then at the end of the year, I'm gonna give 10,000 for the next year. So I'm essentially gonna bunch my donations from two years into one tax year. Now maybe my charitable donations alone are 20,000. Maybe I have state, local and property taxes at 10,000.

Speaker 1 (11:32):

Now I'm potentially exceeding that standard deduction amount. This would be very helpful for someone who is very close to exceeding the standard deduction amount, but they're not quite there yet. So let's just say your itemized deductions add up to $28,000 as a married couple filing jointly. You're giving $15,000 a year, for example, and you decide to bunch your donations. So now instead of giving 15,000 and your total itemized deductions adding up to 28,000, so you double it, now you're giving 30,000 in charitable donations and you still have approximately $13,000 of other itemized deductions, now you're up to $43,000 of itemized deductions. And that is gonna give you a tax benefit in that current year. And you might say, well, what about the next year? I'm not gonna get as much benefit. That's not true. You're gonna get the standard deduction, which is what you would've received anyway, had you just given the same amount each year.

Speaker 1 (12:34):

Last but not least, and the fourth strategy that I'm gonna cover today using a donor advise fund, and this goes right along with previous strategy of bunching, and I like to call this, this is for people who want to do mega bunching. A donor advice fund is essentially a charitable investment account that can only be used for charitable donations and it allows for several years of giving in one year. So instead of bunching two years, like we just talked about, what if I want a bunch 10 years of giving into one year, and let's just say I want to give $10,000 a year for 10 years. I can take in one year, I can take a hundred thousand dollars and I can contribute that to a donor advised fund. I'm going to get the tax benefit of those a hundred thousand dollars of of itemized deductions, of charitable donations.

Speaker 1 (13:27):

I'm gonna get that entire tax benefit in the first year, but I can put those donations in a donor-advised fund, which is an investment account for your charitable donations. And then I can distribute that money over time to different charities as I wish not, doesn't all have to be in the same year. And when I distribute that money to those charities, I don't get any additional tax benefit. It's nothing like that. I already received my tax benefit, but it gives me some flexibility. If I want all of the deduction now, but I am not ready to give all of the money now, it does give me some flexibility. There is no example. There is no scenario that you can get that money back for you. That money has to go to a charity. So this is not like an HSA, for example, where I put the money in for medical expenses and if I really need it, I can get it out and perhaps pay a penalty or pay taxes if it's not what I put it in there for.

Speaker 1 (14:28):

No, you cannot get money out. It is literally not owned by you anymore. In fact, the term that is used, you're not controlling distributions, you're recommending grants to certain charities. Now, if you get set up with a good donor-advised fund custodian, most of those grants are gonna go through as long as they meet the qualifications for a grant. As long as it meets those criteria, then you're fine, but you're, you're technically recommending grants and not directing them. So we've covered a lot of ground and talked about four strategies. The beauty of these strategies is you can actually mix and match some of them. And one of my favorite strategies is to gift appreciated shares of securities into a donor-advised fund. If that's something that you're using, if you like to do a mega bunching of your charitable donations and take multiple years of giving into it in one year, maybe you have a a stock or a mutual fund that has a ton of unrealized gains, you can take that fund, take that stock, donate those appreciated shares into your donor-advised fund.

Speaker 1 (15:36):

And that is something I like to call a double whammy tax savings. That is not an official term, but that is what you can get. So don't forget to mix and match strategies when you can. So the main reason that I wanted to do this video is again, I see a lot of people who are not getting benefits for their charitable donations. If you're watching this, I know that's not the main reason that you're giving to charity. Most people we're giving to charity because we care about the cause that we're supporting. But if you can get additional tax benefits while supporting the causes and the charities that are important to you, I only ask why would you not do that? So if you need assistance, if you're not sure you watch this video, you're wondering, can I use any of these strategies? Go to retirement power hour podcast.com, click the work with me button, or you can click submit a question.

Speaker 1 (16:33):

You can send your question in, type it up. We may cover it on a future show, but we will get back to you with an answer. And I'll sit down and I'll, I'll help you work through this and see if you would be a candidate to use any of these strategies. But if you're giving the charities in cash, at least consider using one of these four strategies. With that being said, I wanna thank you for watching or listening to this episode of The Retirement Power Hour. We help listeners invest wiser and retire better. We'll see you next.