Qualified Charitable Distributions

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If I were a betting man, I’d say there is probably a pretty good chance that you have recently put the finishing touches on your tax return. If I’m wrong, congratulations on getting your taxes done early! Your CPA thanks you, trust me. If I’m wrong because I just reminded you that your taxes are due on April 18th this year, save this post for later and make double sure that your CPA is filing you an extension!

Either way, while taxes are still likely fresh in your mind, I wanted to mention something to you for this year called Qualified Charitable Distributions. For those of us who do not like to type or write long words, we affectionately call them “QCDs.”

Qualified Charitable Distributions allow an IRA owner who is over age 70 ½ the opportunity to directly transfer up to $100,000 annually from an IRA to a qualified charity tax-free. QCDs are not new in the sense that they were created by Congress back in 2006 as part of the Pension Protection Act, but they have had a roller coaster history ever since. In the initial legislation, QCDs were only to exist for two years, and at the end of 2007, the opportunity to make QCDs was no more. QCDs became popular during that time period though, and almost every year since 2007, Congress hemmed and hawed over whether to bring them back each tax year or not. Some years they did, some years they didn’t, and some years they did retroactively (I wish I could do things retroactively…). To put it simply, it was a mess. Thankfully, as a result of the Consolidated Appropriations Act of 2016, QCDs are back, and for now at least, they are back permanently.

When a taxpayer makes a QCD, they don’t report taxable income for transferring money from their IRA and they don’t report a charitable deduction, either. It’s almost like it never happened for tax purposes. If a taxpayer just withdrew money from their IRA and donated it like normal, they would report the taxable income and they could take a charitable deduction. The taxpayer gets hit with the “stick” of the additional income, but receives the “carrot” of an additional deduction. So which should you do?

I’ll be honest with you, in most cases, the initial difference on your taxes from charitably gifting by making a QCD or not making a QCD usually appears pretty small, but that doesn’t mean you shouldn’t consider a QCD. By not having to report the additional income when you make a QCD, it’s possible you can avoid triggering or reduce the damage of some of the tax laws currently in place that penalize taxpayers. Charitably giving by making a QCD could reduce your income taxes on your Social Security benefits, it could reduce a phase-out of your itemized deductions, and it could keep your income under one of those heinous Medicare income thresholds so that your insurance premiums don’t increase. If you don’t have a lot of deductions and take the standard deduction instead of itemizing your deductions, a QCD is likely a good idea for you because otherwise you will be recognizing income and not having enough deductions to get any credit on your taxes.

I know that was a lot, and I’m sorry. I’m still a recovering CPA... My point is if you or someone you know is over age 70 ½, they have an IRA, and they are charitably inclined, make sure they ask their CPA about this new potentially tax-saving tool that we now permanently have in our taxpayer toolbox. Just do your CPA a favor, and ask them after April 18th!

-Tom

Donor Advised Funds

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Do you want to give money to a good and noble cause, but haven’t really found one that you like? Do you already give cash or appreciated stock to several charitable organizations, but wish you could give more? Are you already giving about as much as you realistically can and still wish you could give more? Perhaps you’ve had a really good year at work, you sold a business, or one of your stock holdings shot up like a rocket, and you want to give charitably over time and not all in one year? If you or anyone you know can relate to the above scenarios, you are not alone, and I may have just the solution you have been looking for: a donor advised fund.

A donor advised fund is an account that is maintained by a sponsoring charitable organization and lets donors give to charity with greater flexibility while still realizing the tax benefits associated with charitable gifting. In English, if you wanted to open a donor advised fund, you would open an account with a sponsoring charitable organization such as Schwab Charitable or Fidelity Charitable, and you would contribute your donations directly to them. This would allow you to lock in your immediate tax deduction just as if you had given a check to the American Heart Association. However, with a donor advised fund, you don’t have to immediately distribute your contribution. For example, if you gave $2,000 worth of appreciated Apple stock in 2014, you could distribute the contribution in 2015, 2021, or whenever you like. You could certainly distribute the funds in 2014 if you wanted to, but you wouldn’t have to, because once you contributed the Apple stock to your donor advised fund, it’s no longer yours. Essentially, you made an irrevocable gift, but you reserved the right to direct where the distribution goes at a later date.

By contributing to a donor advised fund and not immediately distributing your contribution, your contribution “lingers” in your account for a longer period of time. During this time, your contributions can be invested, and any growth will be tax-free. As with any investment, the value of your account could go up and it could go down, but your deduction won’t change (remember, you locked that in at the value of your donation when you originally contributed). This ability to let contributions linger can give a donor time to decide which organizations they want to benefit, and it can give a donor’s invested contributions time to grow and one day potentially offer a greater monetary benefit to a particular charity than the smaller, initial contribution could have offered. (That being said, I know of plenty of good charitable organizations that need money now to advance their cause and further their mission, so you’ll have to personally weigh immediate impact versus long-term financial magnitude.)

If you have a big tax year or your income stream is pretty sporadic (a lot one year, a little for a few years, then a lot again one year), donor advised funds can really be a good fit for you. If you’re charitably inclined, your CPA and financial advisor are probably encouraging you to give in those good income years so that you can fulfill your charitable desires and hopefully maximize your charitable deductions. As we discussed earlier, a donor advised fund will allow you to lock in your donation in that high tax year, but it will also allow you to give as you wish. Another way of saying this would be that a donor advised fund lets someone make charitable contributions sporadically and strategically (to their donor advised fund) and charitable distributions (to qualifying charitable organizations) smoothly, or however they wish.

Finally, what happens if you pass away and still have money left in your donor advised fund? Well, there are several possibilities. You could name charitable beneficiaries that would receive whatever is left in your account, or you could name another person or people as your contingent successor(s) to direct the distribution of assets left in your donor advised fund. Simply naming a charitable beneficiary is smooth and clean, but I have seen cases where naming spouses and children as contingent successors has worked really well. It allows contingent successors to benefit organizations they feel strongly about, and it also powerfully instills how important “giving back” was to the deceased one last time.

A donor advised fund is not for everyone, but I think it’s a pretty nifty tool considering all of the flexibility it offers. It’s sort of like having your own private foundation!

-Tom

Appreciating Appreciated Securities

 


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If you have not started preparing your 2012 taxes, consider this your reminder. If you have already prepared your 2012 taxes, did you have any charitable deductions? If you did, I may have an idea for you to consider in 2013.

Giving cash or clothes to churches, charities, or other qualified organizations is a very admirable gesture in my book. You are sacrificing to help others who are less fortunate. In addition to the good feeling you will probably experience from your generous gifts of cash, clothes, shoes, or books, the U.S. Tax Code will also likely allow you to take a charitable deduction that could potentially lower your income tax bill. It seems like a win-win situation, but it could be even better; the U.S. Tax Code also offers tax benefits to those who gift stock, particularly appreciated stock (stock that has gone up since you bought it), to charitable organizations.

How could giving stock be better you ask? Let me give you an example of one of the best tax planning “tricks” in the book!

Example: Bob and his wife Susan want to give $10,000 to the Salvation Army. They have some extra cash laying around, their closets are overflowing with clothes and shoes, and they have a considerable amount of Home Depot stock in a brokerage account Bob has been adding to over the years. Bob knows he could write a check to the Salvation Army like he does every year, he and Susan have needed to go through their closets for longer than they’d like to admit, and Bob remembers his friend Steve talking about what a “great deal” he got by giving his church some stock last year, but what should Bob do?

Bob and Susan can obviously give anything they choose in any manner(s) they choose, but here are the likely results of their three different options:

• Cash: This is probably the easiest and quickest way to give. Write a check, donate online, pay by credit card - whatever. You will help a charity and likely get a tax benefit. You will need to keep good records though (see “Records to Keep, Cash Contributions”).
• Non-Cash Items: While this is a great way to clean out your house and instantly provide gently used items to those in need, it will require more effort both when you clean out your closet and when you file your taxes. The number of hoops you will have to jump through  (see “Records to Keep, Noncash Contributions”) in order to claim a charitable deduction grows as your non-cash donations increase from less than $250, to between $250 and $500, to between $500 and $5,000, and above $5,000, so please keep this in mind if you choose to donate non-cash items. I’m not saying this isn’t a good way to give charitably, and I’m certainly not giving you another excuse to neglect your overflowing closet, but I am saying that you might want to box up your stuff and give $500 or less of non-cash items per year so that you don’t have to remember the day you bought a sweater and how much you originally paid for it, pay your CPA more to fill out another very detailed tax form, or even have to consider bringing in an appraiser. 
• Stock: As I mentioned earlier, Bob has a brokerage account with a lot of Home Depot stock in it. While he’s bought additional shares from time to time, he bought most of the shares on August 17, 2000, for $51.37 per share. Considering Home Depot closed at $71.37 per share on March 8, 2013, that means he has unrealized gains of $20 per share on most of his shares. If Bob and Susan want to give $10,000 to the Salvation Army, and Home Depot is at a price of $71.37 per share, Bob will need to transfer about 141 shares to the Salvation Army ($10,000 / $71.37 = 140.11 shares). Transferring these shares will likely require a call to his broker or financial advisor (and maybe even the Salvation Army) and some paperwork, so this is more complicated than just writing a check, but this is the strategy I would probably recommend for Bob, and here is why:
• If Bob transfers 141 shares of Home Depot to the Salvation Army, he and Susan will probably be allowed to take a charitable deduction for the current fair market value of the stock at the time of the transfer ($71.37 per share in our example) of around $10,000. That’s just as good as giving cash!
• If Bob transfers 141 shares of Home Depot to the Salvation Army, he and Susan will not have to worry about any of the long-term capital gain taxes they would have encountered had they sold 141 shares of Home Depot stock and then given the cash to the Salvation Army, or used the cash themselves. Assuming Bob and Susan would have faced the 15% long-term capital gain rates, by giving the stock directly they saved themselves around $423 in taxes [($71.37 fair market value price - $51.37 purchase price) x 141 shares x 15% tax rate]. If they were higher-income taxpayers and faced the new 23.8% long-term capital gain rates, they saved themselves around $671 in taxes [($71.37 fair market value price - $51.37 purchase price) x 141 shares x 23.8% tax rate]. Those tax savings make giving appreciated securities better than cash!
• Now that Bob has $10,000 less of Home Depot stock than he might want, he can take $10,000 worth of his excess cash and purchase some new Home Depot shares. He would once again own around the same amount of Home Depot stock, and his new shares would have been purchased at around the current fair market value price of $71.37 per share. That means if Home Depot’s stock price continues to rise and he ever decides to sell the stock in the future, the gains on his new shares would only be based on stock price appreciation above his $71.37 purchase price - not the $51.37 purchase price of the shares he gave to the Salvation Army. Those potential, future tax savings could be worth something as well! (Of course, Bob could also decide not to use $10,000 of his excess cash to replace the Home Depot shares, and he could add those funds to his prudently diversified portfolio, but that’s for a different day…)

If you give charitably, I applaud you, and I hope you will keep on giving. If you currently don’t give charitably, please look after you and your family first, but I hope you will one day consider it. Either way, after today’s post, it is my goal that you now appreciate your appreciated securities a little bit more, and will consider the potential tax benefits of making stock gifting part of your charitable gifting strategy in 2013.

-Tom

Robin Hood

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I often got harassed in college for wanting to be an accountant. I had my reasons, and believe me, none of them had to do with cubicles, ten keys, or green visors. I wanted to become an accountant and, in turn, became a financial planner so I could “do” the math that I love, follow the news and investments that have always interested me, and get to know new people and hopefully help them. I’ve always been motivated by helping others, and that’s because helping others makes me feel like Robin Hood. You read correctly: Robin Hood. Now I don’t wear Sherwood green, and I’m certainly not often a “man in tights,” but I do view my job’s purpose as being eerily similar to the path chosen by Sir Robin of Locksley. I promise you can trust me with your deepest financial concerns and your largest investment portfolio, but I should probably tell you that I frequently help my clients rob from the “rich” and give to the “poor." Let me explain…

I get to be Robin Hood because of tax planning. As an accountant and a financial planner, I frequently work with clients on ways to lower income taxes and reduce estate taxes. This allows my clients to give less money to the government and direct the destination of more of their money. One of the biggest arrows in my quill of tax planning opportunities is charitable giving, and charitable giving lets me take my Robin Hood complex one step further. By making charitable donations, my clients give less to the government and get to help a lot of worthwhile organizations; many that benefit the sick or less fortunate. That’s why today, I want to briefly discuss charitable giving.

People make charitable contributions for a variety of reasons: some feel religiously obligated, some feel socially obligated, some donate out of the genuine goodness of their hearts, and some people contribute solely for the tax benefits. I know people who fall under all of these categories, but I never judge my clients’ reasons. I only look at the fact that charitable donations are win-win situations, because the donor is not only getting a tax benefit, but is also helping a good cause or several causes.

How can you donate? As you probably know, you can give cash. You can also give property. I would like to point out that, while you won’t be eligible for a tax deduction for the value of your time or services given to a nonprofit or charity, that doesn’t mean you can’t still donate your time or services.

To whom can you donate and receive a tax benefit? Per the IRS’s latest publication, you can donate to religious, charitable, educational, scientific, and literary foundations or organizations. You can also make a donation to organizations working for the prevention of cruelty to children or animals, war veterans’ organizations, certain non-profit entities, or to the United States (or any individual state) itself. Under tax treaties, there may also be tax-deductible donations you can make to Canadian, Mexican, or Israeli charities. Just be sure to check with the organization and your CPA or financial planner to make sure your donation will yield the tax deduction you are expecting (as always, there are specific tax laws).

To whom should you donate? I would say to whatever cause(s) you feel the most passionate about. Perhaps that means you donate to a church, to your alma mater, or maybe to an organization looking for the cure to the disease that took your grandmother from you way too soon. For what it’s worth, some of my favorite organizations are: The Salvation Army, Epworth by the Sea, the Alzheimer’s Association, the Arthritis Foundation, and the Rally Foundation.

Before you make any charitable donations or increase your charitable giving, please note that you must look after your financial security first. You are by no means the Sheriff of Nottingham by doing that; you are just being realistic. I also want to emphasize that you are never making money with charitable donations; you are simply shifting who gets what percentage of money by making a donation or donations that happen to change your effective tax rate or get you below an estate tax exemption. A charitable donation may not make you better off, but you will have the satisfaction of knowing you made a cause, or the people who benefit from the cause, better off. An added bonus is that you might just feel like Robin Hood, or at least Little John.

-Tom