Stewart Welch joined us with some pointers for smart giving for savvy money strategists. As we move into the holiday season we also move into that time of year when a lot of people make gifts to their favorite charities and religious organizations. Many people simply write a check but there may be a better way to give. Consider these easy and smart strategies:
Smart Giving Strategy #1 - The stock market has been on a tear for the past several years. If you have appreciated securities, give the stock directly to the charity and then buy back the shares assuming you want to continue holding them. For example, you plan to make a gift to your church for $10,000. You own a stock worth $10,000 that you paid $1,000 for your cost basis. If you sell the shares, you owe capital gains taxes on $9,000. Instead of writing directly to your church, gift them the stock then use your cash to buy back an equal number of shares of the same stock. Your 'new' stock will now have a $10,000 cost basis so if you needed to sell it later, you've significantly reduced your tax liability. Of course, a charity never owes taxes on your gifted shares.
Smart Giving Strategy #2 - This is Stewart's personal favorite. He strives to give away 10% of my income annually but, typically, he hasn't decided on the exact amounts or charities. In order to get the tax deduction this year, Stewart will contribute to a Donor Advised Fund such as the Community Foundation of Greater Birmingham and National Christian Foundation of Alabama. With this strategy, he gets the deduction at the time of the gift but I can take my time to choose the charities and the DAF holds and invests the money until I'm ready. Of course, he combines this strategy with strategy #1.
Smart Giving Strategy #3 - If you are 70 ½ or older this calendar year, you must take Required Minimum Distributions from your IRA account. Typically, your broker sends you a check for your RMD which you, in turn, deposit and must report as ordinary income on your tax return. If, during the year, you make a gift to a charity, you report that deduction on your tax return as well. You can short-cut the process by having your broker pay your RMD 'directly' to the charity. One advantage, in addition to being a simple short-cut, is that this direct gift-transfer has the effect of lowering your Adjusted Gross Income which, in turn, lowers the threshold for deducting itemized medical expenses, miscellaneous deductions as well as the income adjusted surcharge for Medicare Parts B and D. This gifting strategy is limited to $100,000 annually. Also, this strategy is not available for Inherited IRAs.
Smart Giving Strategy #4 - This final strategy focuses on better gift-giving at your death. A lot of people, in their will, make a specific bequest to a charity or religious organization. Assuming you have a retirement account such as an IRA, a better strategy is to use it for your gift. With a simple beneficiary change form, make the charity the beneficiary of a portion of your IRA. For example, say you have an IRA worth $100,000 which is now payable equally to your three children. Change the beneficiary to read: $25,000 payable to the XYZ Charity; balance to my three children equally. Note that nothing happens until after your death so you have access to 100% of your IRA money should you need it. Giving IRA money at your death to a charity you support is a smart money strategy. Why? First, it's easy to do. You don't need an attorney or a lot of paperwork. You simply sign a new beneficiary form. Second, while investing in an IRA is a great strategy for accumulating wealth, it a much less valuable asset to inherit because when your heirs take money out, they must pay income taxes at their highest tax rate. To the extent you use your IRA to give to charity, you're shifting 'taxable' dollars to the charity while allowing your heirs to receive 'non-taxable' dollars in the form of cash directly from the estate. Simple, easy, smart.
There are so many charities worthy of our support. If you want to make a gift, make it a 'smart' gift. Consult with your tax advisor before following the ideas presented in this article.