In this month’s edition of “Money Matters,” Scott discusses the personal and financial value of charitable giving, as well as the financial strategies used to maximize the benefits of your financial donation—to both you and the organization you choose.

More Charitable Giving Considerations

Interested in learning more? Russell James, a Professor of Charitable Financial Planning at Texas Tech University, recently published, and encouraged professionals to share, a list of 10 factors for people to consider as they finalize their charitable giving for 2020:

Deduct $300 without itemizing
This year only (2020)! You can deduct $300 of charitable gifts without itemizing. The $300 limit is one per tax filing unit. (So, married couples filing jointly don’t get $600.) This must be a cash gift paid to an operating nonprofit. (So, not to a donor advised fund.)
Deduct up to 100% of your income
This year only! You can deduct up to 100% of your adjusted gross income using charitable gifts of cash. These gifts must go to an operating nonprofit. (So, not to a donor advised fund.
Combine a Roth conversion with a donation
A Roth conversion moves money from a standard IRA into a Roth IRA. The benefit: all distributions from the Roth IRA are tax free. (Even distributions of future growth are tax free.) The downside: the money moved into the Roth IRA counts as immediate income.
However, this year only, up to 100% of income can be offset by charitable deductions. This includes income created by a Roth conversion. If you already have a multi-year charitable plan or pledge, donating it all this year and combining with a Roth conversion might make sense.
Make IRA gifts @ age 70½+
IRA accounts have no required minimum distribution (RMD) in 2020. But those age 70½ or older can still make gifts directly from an IRA to a nonprofit up to $100,000. This gift donates pre-tax dollars. The earned income is never taxed because it goes directly to the nonprofit.
Move your 401k/403b into an IRA rollover now to prepare for future IRA gifts
RMDs will return next year for those age 72+. A qualified charitable distribution from your IRA or IRA rollover reduces RMD. It’s a great way to give!
To do this with a 401(k) or 403(b), you must first convert the account into an IRA rollover. But conversion requires first taking any RMD from the 401(k) or 403(b). You must pay taxes on that distribution.
You can avoid that by making the conversion this year. There are no RMDs in 2020. So, you can convert your 401(k) or 403(b) into an IRA rollover. And you can do it without paying any taxes, even if you are age 72+. Then, you’ll be set up to make future donations from your IRA rollover whenever you want.
IRA gifts @ age 59 ½ – 70½
IRA withdrawals during this age create no penalties. But they are taxable. However, this year cash gifts can be deducted up to 100% of income. If you are already itemizing deductions this can help offset the tax impact from an IRA withdrawal.
IRA beneficiary v. gift in a will
Many people like to include a charitable gift in their will to support a cause that has been important in their lives. One tax smart strategy is to leave part of an IRA, 401(k), or 403(b) account to a nonprofit. (It’s easy to change account beneficiaries by contacting the financial institution.)
Why is this smart? Because heirs pay income taxes on this money. Starting this year, heirs (except spouses) must take out all funds (and pay taxes) within 10 years of inheriting. But any part left to a nonprofit avoids these taxes. So, if you’re leaving anything to a nonprofit, use these accounts first.
Make a charitable swap: Give appreciated investments WITHOUT changing your portfolio
Donating appreciated assets creates TWO tax benefits. The tax deduction is the same size as a gift of cash. (The asset must have been owned for a year or more.) PLUS, you avoid paying capital gains tax.
With a charitable swap, you donate old shares of stock and immediately purchase new shares in the same company. Your portfolio doesn’t change. But the capital gain is removed. (There is no waiting period. Why? Because this is gain property not loss property. So, the “wash sale” rule doesn’t apply.)
Take an immediate deduction for donating inheritance rights to homes or farmland
Many people like to include a charitable gift in their will. But you can donate the inheritance rights to farmland or a home using a special deed instead. Doing this creates an immediate income tax deduction. Right now, these deductions are large because interest rates are low.
Example: A 55-year-old donor deeds the inheritance rights to $100,000 of farmland before the end of 2020. The donor gets an immediate income tax deduction of $90,371. The donor keeps the right to use the property for the rest of his life. It’s deductible because, unlike a will, the donor can’t change his mind once the gift is made.
Bunch gifts with a donor advised fund
The 2018 tax law created much higher standard deductions. Fewer people can use charitable deductions because they aren’t itemizing. One way around that is to “bunch” charitable gifts.
Example: A donor puts 5 years’ worth of donations into a donor advised fund. The donor takes a tax deduction for the entire amount in that year. Because the deduction is so large, the donor itemizes in that year. In later years, the donor makes gifts to charities from the fund. This creates no tax deduction. But in those years the donor takes the standard deduction instead of itemizing.

As always, I strongly encourage you to talk to a financial advisor before finalizing your charitable donations. There are numerous strategies and options in place that can work to maximize your donation—for both you and the organization receiving your donation!

If you’d like to discuss your charitable giving options, please feel free to contact me anytime.

Money Matters: Charitable Giving Financial Strategies Transcript

0:00:00.2 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He's taught hundreds of financial professionals retirement planning and wealth management strategies. And Scott joins us now by phone. Welcome, Scott.

0:00:21.8 Scott Oeth: Good morning CJ.

0:00:23.6 CJ: Good morning. So it is getting dangerously close to the end of the year, so let's talk about charitable giving. Lots of folks would like to make more financial gifts to charity but struggle with the right amount to give. Any suggestions?

0:00:40.7 SO: Yeah, this is the giving season, so yesterday was Giving Tuesday, we're getting towards the end of the year, and in this year in particular, I think there is a heightened desire to want to help and to support organizations that are helping people, and so it's definitely a topic that's on people's mind, and I think to your question about how much to give or helping figure out what you can do, charities are always interested in time and volunteering and your talent, but they're certainly interested in your treasures as well. And I think what I've seen with many folks is there's a desire, but there's a lack of confidence in knowing, "Am I gonna be okay, is my family gonna be okay? How much can I give financially to help support causes that are important to us?" And I think that it really starts just getting really super clear in your financial goals, in your priorities, and understanding how much do you need to be putting towards your own future financial goals for your family, your home, education, retirement, legacy, and good financial planning work can help you figure out how much can I budget each year for charitable giving? Could I look at my assets on my balance sheet and tap some of those to support charitable giving.

0:01:56.7 SO: And what about legacy? So I think it's all intertwined. And certainly, accountants are good resources, attorneys are good resources. A lot of organizations, charitable organizations have plan giving directors who can help, and I think there's a strong role for a good Certified Financial Planner because they're trained to look across the tax and legal and financial aspects and wrap it into your overall planning.

0:02:18.7 CJ: Okay, but what about making gifts of other assets besides cash?

0:02:23.2 SO: Yes, so many folks feel somewhat limited to their checkbook, they... There's a cause they'd like to help, and they think, "Geez, what's in my checkbook or I should I put this gift on my credit card. I'd like to help." And that tends to kinda limit their thinking and just honestly, CJ, oftentimes giving cash is the least effective gift. You work hard for your dollars, there's payroll taxes, there's federal taxes, there's taxes to the state, and what's left in your checkbook is a fraction of what you earned, so it's often the least effective way. If you have appreciated assets, stocks, bonds, financial assets are the most common, but for some folks that might be real estate or farmland or business interest, if you can give appreciated assets, aside from helping the charity, there's gonna be at least two big tax benefits. You get a tax deduction for the size of that gift, your income taxes. If estate taxes apply, those gifts are removed from your estate tax calculation, but the other big one is on those gifts that have gone up in value, if you give those directly to a charity, no capital gains tax would be due. So it's a real double whammy and something we touched on a bit before Required Minimum Distributions (RMD). You and I talked about that last month, CJ.

0:03:47.0 SO: If you're 70 and a half, you can do what's called a Qualified Charitable Distribution (QCD). You can actually give gifts from a IRA or a retirement plan directly to the charity, which is just wonderful because then no income tax is due on those assets. So it can be enormously complex. Definitely an area to get expert advice, seek your own counsel, but there can be a real advantage as to looking at your entire balance sheet, and I'll just make a quick mention, there's a wonderful tool called the Donor Advised Fund (DAF), that a lot of charitable organizations have, a lot of financial institutions sponsor these. This is a wonderful vehicle where you can gift appreciated assets, you can hold them there, you get an immediate income tax deduction, and then you can donate gifts over a number of years, and this works very well because we have a very high standard deduction right now. So it let's people think about several years worth of gifting at once and make that gift and then trickle the gifts out over time, so it's something to look at for folks. Highly recommend it.

0:04:44.3 CJ: Alright, and in the past few Money Matters episodes, we've talked about new tax rules for 2020. Are there any that are specifically related to charitable giving that we should know about?

0:04:55.5 SO: Yes, there are some important ones. I think a great one that's available to a lot of folks... The thing about big gifts and high end gifts, it's exciting, but the small gifts really add up too and they're really important, and the CARES Act allows for a $300 cash gift deduction, a what's called an above the line deduction, meaning it doesn't have to be an itemized deduction. Everyone can claim it. So up to $300 cash, as long as it's going directly to a non-profit, you can take that deduction, even if you don't itemize your deductions. Which is again, getting into a more complex tax area that people need to know about. So that's a big one. If you have the resources and you have the willingness, you can actually deduct up to 100% of your adjusted gross income as a cash gift this year. That's new. That's a special 2020 gift. Usually, there's limitations depending on whether it's a public or private charity and the type of gift that you're giving, so that's a big one and that ties in, in the past on Money Matters we've talked about Roth Conversions this year, and the reasons why this might be a special year and that could be a very powerful strategy to help charity, give a significant gift, but then improve your financial position by offsetting Roth conversions.

0:06:14.2 SO: And maybe just one other one to touch on really quickly is that charitable qualified distribution from your IRA. CJ, we talked about Required Minimum Distributions (RMD) last year, the RMD age has been moved back to age 72, that's a new rule. People are not required to take a required minimum distribution in 2020, but they're still allowed to do the QCD, qualified charitable distribution, at age 70 and a half where you can make that wonderful gift directly to charity and not have to pay income tax on all those assets that are built up in your IRA or retirement plan.

0:06:47.0 CJ: And there are so many charities that could really use the help this year.

0:06:50.2 SO: Absolutely.

0:06:51.9 CJ: Right. So we're talking with Scott Oeth, and we're talking finances with Scott on the first Wednesday of the month on North Shore morning. Anything else you'd like to add, Scott?

0:07:02.9 SO: Well, I really enjoyed the conversation. We have touched, like I say, on some these other topics in past episodes, so check out the WTIP site and I've been loading them on my blog as well. Feel free to reach out if you have any questions and consider it and give some good advice. Seek your own counsel and take a look at what you can do, you might be surprised if you're able to look at your full financial picture and how you can help.

0:07:25.7 CJ: What's your blog, Scott?

0:07:27.8 SO: It's just www.scottoeth.com.

0:07:32.6 CJ: Alright. Thank you so much. We'll talk to you next month.

0:07:34.6 SO: Thanks, CJ.