Charitable Giving Strategies

I had a new client come to me one time with a big problem. A big, $135,000 problem. The problem’s name was taxes. He had sold a piece of land in West Texas and came to me to help him manage this windfall. My projections were telling me he would have a $135,000 tax bill just from the gain on this property. And nobody wants to add that to existing taxes.

I knew from reviewing his previous tax returns that he had a big heart and loved to help out multiple charities. This led us into a great discussion where I outlined some options for him to lower his tax bill through his charitable donations. I’ll share some of the options with you in case you also donate to charities and want to learn more about unique ways to do it.

Gifting Stock

One option he had was to donate investments to charity instead of writing checks from his checking account. You probably know that when you give cash to a charity, you can list that donation as an itemized deduction on your tax return. What you may not know is that you are able to give things besides cash. Specifically, it is great to donate appreciated stock.

This client had a lot of stock in his company and I wanted to sell some anyway so I could diversify his investments better. However, the stock had a big, unrealized gain and I was aware of the additional taxes this would create. The great way around this is to just give the stock to the charity instead of giving cash. This way you avoid the taxes from selling the stock and get to list the full value as your itemized deduction. The charity gets to receive the stock and sell it tax-free. It’s a win-win for everyone (except the IRS). Many charities are set up to be able to accept stock donations, so just ask about this option.

Donor Advised Funds

There is another great option if you want to donate stock but want to spread out your giving to multiple charities. You can open a Donor Advised Fund. This is a charitable account that you open, typically at a brokerage firm. Vanguard, Schwab, and Fidelity all have large Donor Advised Funds. You can donate appreciated stock to your Donor Advised Fund and take your tax deduction in the year of your donation. The Fund will sell the stock (tax-free) and either hold the cash for you or reinvest the proceeds in other investments. When you are ready to give that money to your charities, you “recommend” that the Fund send a check to the charity of your choosing.

I really love the Donor Advised Fund accounts for many reasons.

• They simplify the records that you need to keep for tax time. You only report the donation to the Donor Advised Fund, not each individual charity.
• They allow you to separate the year you take the tax deduction and the year(s) you give the money to the charity.
• They allow you to diversify and invest this money that you will eventually give to charities.
• You can leave a Donor Advised Fund as an inheritance to your family. They are able to continue your legacy of giving.

We’ll have a future blog post digging into more of the details of Donor Advised Funds because they’re that great.

Giving From Your IRA/Qualified Charitable Distribution

If you are over age 70½ (seriously, what is Congress thinking with these ages…) you have another charitable option available to you. If you have a Traditional IRA, once you reach age 70½ the IRS makes you start taking Required Minimum Distributions (RMD) from your IRAs. They want to collect taxes on these retirement accounts that were funded with pre-tax dollars while you were working.

You can offset some of your RMD though by donating it directly to a charity. This is called a Qualified Charitable Distribution. The IRS allows you to give away up to $100,000 per year of your RMD directly to charity. Usually you would pay tax on money coming out of your IRA, but if it’s donated directly to charity, you don’t have to pay tax on it. Realize you don’t get to take a tax deduction for it, but reducing your income is better than taking a deduction anyway.

Other Options

Lastly, there are other more complicated options out there to reduce your taxes through charitable donations. You could create a private foundation. These can be expensive to set up and maintain, but give you a lot of flexibility in how you donate. You can also set up multiple types of trusts to give to charities. These are sometimes known as CRATs, CLATs, CRUTs, or CLUTs. I’m not going to talk about these in more detail besides mentioning their funny acronyms.

Ultimately this client decided to open a Donor Advised Fund and donate $100,000 of company stock to it. He avoided the 23.8% tax he would have owed if he had sold that stock. And he also received the tax deduction, which reduced his taxes by approximately $30,000. So all in all he had $100,000 less in his pocket, but it all went to charities he chose instead of the IRS. He loved the idea that he could reduce taxes in his big-income year, yet give it to charities over multiple years.

I love doing charitable planning, and if you have questions specific to your situation reach out to me! I’d love to help.

We’re taking a break from the blog for the holidays. Merry Christmas and we’ll see you in 2019!

Disclaimer: The above description of charitable techniques is very high level. There are several rules that must be followed to receive the tax benefit you expect from these strategies. The above ideas may or may not work for your specific tax situation. Always seek the advice of your CPA (and your great financial advisor) before making complicated tax moves. Also, the client situation above is based on a real situation, but I changed some of the details to keep everyone anonymous.