If you haven’t seen Amazon’s Christmas toy catalog, it’s something to behold. Not only is it filled with hundreds of enticing children’s toys (prices not included), but it also contains sticker sheets and pages of activities to keep any child occupied for hours on end. Amazon is clearly playing chess with outmatched checkers-playing parents. Check mate.
I got an up-close glimpse of the catalog recently as I lay sprawled on our living room floor. Like the pile of current toys that sent me flying face first into the carpet, this catalog of new toys lay neglected where it had been last used.
There was no Ralphie Parker subtlety here. No chance for a Tinker Toy slip-up. Every desired item was carefully circled and initialed by our oldest son to ensure zero confusion regarding who wanted what.
With as much of a struggle as I’ve found trying to center my children’s focus on giving rather than receiving, it’s ironic to think that December is actually National Giving Month. In fact, nearly one third of all annual charitable gifts occur during the last 31 days of the year. With that in mind, it’s a great time to take a break from the incessant consumer marketing and highlight three smart giving strategies you can use this month.
Cash Is Not King
You’ve probably heard the mantra a thousand times, but when it comes to charitable giving, cash is not king. It is actually the least tax-efficient way to give charitably. It represents a gift that has already been taxed. On the other hand, if you donate appreciated assets (investments that have gained in value), the gain – which would otherwise be taxable – is tax exempt. It can even provide you a tax deduction which can equate to more dollars going to your favorite charity and less dollars exiting your pocket for taxes.
Giving appreciated assets can also be a strategy to “step up your basis” in an investment and reduce future taxes. Let’s say you want to keep a particular investment in your portfolio. Maybe you were gifted stock from a grandparent. Or, maybe you just want to maintain your holding because you feel it’s a good investment to own. You can accomplish each one of these desires by donating the stock and then using the cash you would have otherwise given to the charity to buy the same amount of the donated investment. By establishing today’s value as your new cost basis, you’ve effectively erased the taxable gain in the amount donated while maintaining the same equity position.
Avoid A Gaffe; Use A DAF
If donating investments directly to a charity seems daunting, Donor Advised Funds (DAF) can help with the process. To use a DAF, you open an account, transfer investments into it, and then direct the fund to send the investments to charities of your choice. A DAF can help you gift stocks, real estate, business interests and more!
For tax purposes, the charitable “gift” is considered to have occurred when the funds were place in the DAF. This important distinction is helpful for tax deduction planning. For example, if a charitably minded individual is close to itemizing tax deductions each year (as opposed to claiming the standard deduction), they could front load several years’ worth of charitable giving in a DAF. They would qualify for itemizing deduction that year and then return to claiming the standard deduction in following years. It also provides for continuity of regular charitable gifting from the DAF over those years.
Turn An RMD Into A QCD
It’s tempting to chalk up RMD and QCD as just two more initialisms floating in a sea of financial alphabet soup. But if you’re approaching 70, don’t ignore it! Individuals with a traditional IRA or 401k must start taking Required Minimum Distributions (RMD) at age 73.
RMDs are fully taxed at your current tax rate. You can choose instead to send some or all of these required distributions to charity with Qualified Charitable Distribution (QCD) in lieu of making a cash gift. A QCD eliminates the tax liability on any gifted amount altogether (again, cash is the least tax-efficient method of giving). You also don’t have to wait until age 73 to make QCDs. You can begin as early as age 70.5.
If you’ve made it this far, kudos! But you may be wondering how we got from a somewhat blatant condemnation of consumerism to lauding the tax benefits of charitable giving. It seems a bit like we’re back to focusing on receiving rather than giving.
I don’t think we need to fabricate tension here. Certainly, being consumed by a desire to gain tax benefits could begin to resemble a Ralphie-esque campaign to acquire that “Red Ryder carbine-action 200-shot range model air rifle,” but let’s remember that each one of the above strategies requires an actual gift. Making sure our gifts are done in a tax-efficient manner ensures the most money possible going to the charity
As an advisor, I love helping charitably-minded individuals plan for smart, tax efficient gifting. If you have any questions concerning any one of these strategies, please don’t hesitate to schedule a time to chat on my calendar.