Ep #12: Giving Tuesday

Benjamin Haas | Nov 25, 2020

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Full Transcript:

Benjamin Haas 00:03

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!

Adam Werner 00:26

Alright, here we go. How you doing?

Benjamin Haas 00:30

I'm excellent today. How are you?

Adam Werner 00:33

Fantastic! Today we have a good topic and timely in observance of Giving Tuesday, which for those that may not be familiar, Thanksgiving upcoming, Black Friday upcoming, then Cyber Monday, and now Giving Tuesday is the Tuesday after Thanksgiving. So we're going to talk about maybe some misconceptions, some tips and tricks when it comes to charitable giving, and how we view that from a planning perspective. We're pretty lucky to work with a group of clients that are very charitably inclined. We'll go a little bit deeper down that rabbit hole of maybe some more things to think about other than just writing that check to the local charity of your choice.

Benjamin Haas 01:22

I think it kind of starts with that idea that there are many different reasons to give and Giving Tuesday kind of following probably spending all this money right after Thanksgiving. Getting ready for the holidays, maybe makes you feel a little bit better. There clearly is the emotional side to giving and kind of supporting charities, but there always was that conversation on "you get these tax benefits from doing that, right?" Well for a married couple, the standard deduction being close to $25,000 now, if you're not giving away significant dollars, that would warrant you “itemizing” your deductions to get above and beyond that, then, really the tax benefits of gifting like they've kind of gone away now.

Adam Werner 02:09

I think that's certainly one that we see as a common misconception, it was the 2017 tax cut and JOBS Act. It changed the tax code, where historically, if it was very easy for people to itemize, if you had a mortgage, you had some deductions, you did some charitable giving, it was very easy to get above that $12,000 threshold. Now, that's more than doubled. So if you're writing some checks over the course of the year, you do some giving, unless you're getting well above that $25,000 deduction, the standard deduction now, it's hard to get enough deductions to get above that to where you're actually getting the tax break for doing your charitable giving. The IRS took that away as a reason to do charitable giving. There are still many reasons to continue to do it. I think that's one thing that it's more recent and people don't realize that there's no tax break to do charitable giving unless you're itemizing your deductions at this point.

Benjamin Haas 03:12

Two things popped into my mind and then let's really jump into the meat of this. First of all, the CARES Act this year, the government's response to the economic shutdown, the turmoil based on COVID, it gave everyone the ability this year regardless of their deductions, to get $300 worth of charitable deduction this year for the gifts, so do it. Take that 300 bucks, if it was, money in the offering plate, if it was to your favorite local charity, if you haven't done it yet, Giving Tuesday, there's the plug, give the 300 bucks away. But then I want to flip the conversation into us as planners, we kind of want to be creative for you. So there are other ways to get tax benefits and that should maybe be the theme of what we're going to talk about now. If you can't deduct taxes, then let's avoid taxes. We should give some education around that. How do we legally avoid income or other types of taxes based on some giving that we could instruct our clients to do? I know we've got a couple of them and let me start with you.

Adam Werner 04:28

I think maybe it's a misconception but that you always have to give some sort of cash or check or some sort of monetary gift. We certainly see it with our clients. There's ways to avoid taxes on appreciated stocks, mutual funds, ETFs, it's investments. If you've had investments over time that have appreciated, you can gift shares of that investment and you're avoiding the capital gains tax of 15 or 20%, depending on your tax bracket.

Benjamin Haas 05:05

Just to be clear there, this would be money outside of a retirement account we're going to talk about. If you do have some sort of investment, if it's appreciated, you could be responsible to pay the taxes on that investment when you choose to liquidate it. Most institutions in our experience at these days, they're prepared, they're set up to receive gifts or securities and I think many people, whether that was company stock, a gift from a parent or a grandparent, or maybe just your own investments that you've accumulated over time outside of those retirement accounts. I think it’s overlooked in financial planning that is a great way to get some sort of tax benefit, even if you can't deduct it.

Adam Werner 05:50

So what's another one?

Benjamin Haas 05:52

I kind of hinted at it, the retirement accounts. Now this is going to be, I guess I have to frame this up, this is going to be to a specific age group where you are being at this point required to take distributions, the IRS calls that a required minimum distribution but there is a great way to avoid income taxes. If you had to take $10,000 out of your IRA, let's just create a mathematical example here. You may have to depending on your tax bracket, pay 20%, 25%, 30% of income taxes on that where you're only going to get $7,000 in your pocket. If you turn around and gave some of that away, again, you may not get the tax deduction for doing that if you don't itemize. Like we alluded to before, there is what's called a qualified charitable distribution that you can make, which is basically saying, I'm going to take this money out of my IRA and shoot it directly over to my charity and by the way, then I don't have to pay the income taxes. It's a really great way, I think, for our clients who are going to be charitable anyway, to avoid income taxes if they're not itemizing deductions.

Adam Werner 07:05

Yes, so just to be clear there, the RMD age was 70 and a half, why a half year because who knows, if it's the IRS at play here, let's make things more complicated than it needs to be. But now that the RMD age has been updated to now age 70 to you, the age 70 and a half for QCDs for these qualified charitable distributions is still intact. So as long as you're over age 70 and a half, you can do a qualified charitable distribution. I guess one of the caveats for anybody who's thinking about doing this, it must be the very first dollars out of your retirement account in that calendar year. If you took a distribution in January and it went to your bank account, you're kind of done with a QCD for the year. It must be the very first dollars out of the account in any given year.

Benjamin Haas 08:01

There are a couple other nuances that we would talk about but I think for the sake of today, Giving Tuesday, if it's not on Giving Tuesday, and this is something that kind of resonates with you then early next year, put it on your list. We think it's a great way, once again legally, to avoid certain income taxes. What else is on the list of other things that we would talk about with charitable giving?

Adam Werner 08:25

We talked about it, not about this specifically, but with the idea that the standard deduction is so high now, at least relative to what it used to be. There's the idea that if you are doing substantial giving but you're still not quite at or above that standard deduction level in any given year, the idea is bunching gifts or stacking in a particular year. The example being, let's say, you did $10,000 to charity in any given year. I like to give $10,000 to all these different charities and I do that on a pretty regular basis every year. If you're only giving $10,000, you're not probably going to get the itemized deduction but in theory, you could essentially give $30,000 to an entity, with a donor advised fund would be one of them. We don't necessarily have to get too deep in the weeds here but you can essentially pull your tax deduction into one year, the entity of this Donor Advised fund then allows you to slowly drip out of the fund to your charities of choice over time. So essentially, you're just pulling gifts forward into the present into an entity and then you can distribute it to your charities at the pace of your choosing but you're getting the tax deduction because if you do three years worth of your gifting, you're now at $30,000. You get the deduction.

Benjamin Haas 09:48

I think that one, the donor advised fund, is kind of like the first step into bigger, I would say broader, charitable giving planning. That always requires some sort of irrevocable gift. In the same way that once you put that offering into the offering plate, it's not coming back out to you. The donor advised fund would be the same exact way. Once you gift to that, even if it's not dripped out until later in the future, when you dictate that it is irrevocably out of your estate, it's irrevocably been gifted and there are other entities. Some people dabble in Charitable Trust, or there are institutions, charitable institutions that have their own charitable trusts much bigger dollars, foundations, things of that nature, there are many different options. That's where I'd also say, we're running out of time that it's hard to believe, but the clock is ticking oin 2020. What, six weeks left in the year? But to come full circle, if the CARES Act gave everyone that $300 that they could deduct this year, the CARES Act also has given any taxpayer the ability to run their adjusted gross income to zero through charitable giving. There's usually a 60% threshold to that in any other given year so if part of your broader planning, if you're a part of the very small segment that's listening to this podcast and has significant charitable inspiration, 2020 is a great year to do it because there are some tricks of the trade to get your liability practically down to zero.

Adam Werner 11:25

So shameless plug for us. That's clearly the role that we would want to play is to help people efficiently if they're going to do charitable giving, if they're charitably inclined and they are gifting assets, or cash or whatever. Part of our role is to help look at the entire situation and figure out if there's a better way to efficiently allocate their resources to their goals, if giving to charity is one of those goals. There may be a way to do that which is best for all parties involved.

Benjamin Haas 11:59

I think that's a good way of buttoning up from appreciated securities to if you're in that retirement age where you're forced to take distributions. There are no minimums to these ideas of trying to get some sort of tax benefit all the way up through these bigger entities and bigger irrevocable gifts that are a part of charitable planning or estate planning. It's a wide spectrum on a financial profile of who can benefit from these ideas. Great idea to talk about it for Giving Tuesday.

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions voiced in this show are for general information and are not intended to provide specific recommendations for any individual to determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant or financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!

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Ep #12: Giving Tuesday