A lot of retirees who give to charity are paying more in tax than they have to, especially if they have both retirement accounts like an IRA or 401k, and non-retirement accounts like a brokerage account. There are a few small tweaks you can make to your charitable strategy that can help you give more to charity and less in taxes to the government. While tax breaks aren’t why we give, if we could make a few easy changes to get more to charity and pay less in tax, why shouldn’t we?
So let’s get into mistake number one, which is taking the standard deduction but not getting any tax benefit by giving to charity. This is a common mistake that we see, and by using a technique called bunching you can decrease the amount of taxes you pay.
For example, say Jim and Cindy file their taxes, married filing jointly, and the current standard deduction for that is $25,900. Now, they’re filling out their taxes and they’re looking at their itemized deductions, which is medical, interest like mortgage interest, SALT, state and local taxes, and C is charitable. Let’s say it’s 5K of medical they can deduct, 5K of interest, mortgage interest, 10K of state and local taxes, which is the limit, and then another 5K of charity. Overall this looks pretty good, but when they add that all up they are below the standard deduction by $900.
If they took their charitable giving of 5K and they bunched it, and so over two years they’re getting zero tax benefit from charitable giving. But if they changed that 5K to 10K and did two years worth of giving, you can actually do this for three, in one year, all of a sudden their itemized deductions add up to 30,000 – an extra 5,000.
Let’s take a look at the difference between these two right here. 25,900 and 30,000. Now they have an extra $4,100 that they can deduct off of their taxes. This might save them a thousand dollars in taxes, and the next year they’re getting the same tax benefit by taking the standard deduction, because the next year they’ll have zero in this category.
This might be a thousand dollars in savings. What we see a lot of people do with that is they’ll split it between the charity and themselves. So an extra $500 of impact to that charity that they care about, and an extra $500 for them, a thousand less for the government. So bunching is a great strategy.
The second mistake that we see is gifting cash and selling appreciated stock to fund that gift. I always say never write a check to charity if you can help it. I know that’s shocking, but I’ll tell the story to give an example.
Let’s say Debbie wants to give $10,000 to her church. She goes to her brokerage account and says, “You know that tech stock that I bought for $2,000 is now worth 10,000. So I’ll sell that 10,000 and give it to my church.” When she does that, she’s going to get a tax deduction, but there is $8,000 of capital gains, and you want to make sure you own this for over a year to make sure it’s long-term capital gains. But she’s paying tax on the $8,000. That might be, let’s say $2,000 in tax to do that. She’s getting a tax deduction to give the gift, but she’s paying tax and capital gains along the way.
Here’s the better way to go. She gives her $10,000 of shares directly to charity. We always say give shares, not cash. What that does is you give the shares to the charity, they sell it, they turn it into cash, and then you’ve avoided that $2,000 in tax right there.
That’s one of two options. That’s giving it straight to the charity. You can also take those shares and give it to what’s called a donor-advised fund. Donor-advised fund is really like a charitable checking account. Again, you give the gift, you get the tax deduction right away in that year you gave the gift of shares. The donor-advised fund, they turn it into cash. And then from there, you can give… This is for you if you want to give to multiple charities, multiple organizations, or want to spread your gifts out over multiple years and you don’t want to give it all at one time.
Before I get to mistake number three, one example here that we see a lot with appreciated stock, there’s also two other categories of people that might be you. If you’re a business owner and you’re selling your business to do a lot of charitable giving as a part of your tax strategy, see if you can give some of your shares of your business a way to charity first. That will save massive amounts of tax. We see it a lot where the business owner sells their business and then they’re writing checks to charity afterwards. You can save so much in taxes by really reviewing, could you give part of your business away first. Also works with real estate. Before you sell those buildings, before you sell those real estate holdings, can you give part of them away first before the sale? You’re going to save a lot on taxes, and it’s going to mean more to charity, less in tax.
Last mistake. Mistake number three is gifting cash and taking your RMD. This is for those of you who are 70 and a half or older. Let’s take a look at Don.
Don wanted to give $7,000 to the local food bank. He has an IRA and he gives $7,000 to himself to meet his RMD requirements. So 7,000 to the food bank, 7,000 from his IRA. If he’s in the 22% tax bracket, he’s paying probably an additional $1,400 in tax. It’s actually closer to $1,500 for the 22% tax bracket. He’s getting a tax deduction for making the gift to charity, unless he has the standard deduction like before.
If he does not need his RMD, there is a great opportunity for him to give that RMD directly to the food bank. He gets to meet the RMD requirement and he still gets to give that gift to charity. Also, he doesn’t pay tax on this distribution – it’s called a qualified charitable distribution. If you’re 72 and you’re in RMD land, you can do this. After you’re 70 and a half, you can start this strategy as well.
Here’s a link to book a free philanthropy session. We’ll see you in the next one. Thanks.
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