Avoid this trap when giving to charities!
If you are reading this post, I already like you because chances are you are charitably inclined and making a difference in your community or somewhere in the world by giving to charities. Take a minute to reflect and imagine what the world would look like if everyone shared a little of what they had to help someone less fortunate or gave a little of their wealth to improve the world we all share and enjoy.
According to charitynavigator.org in 2017, $410 BILLION – with a “B” BILLION– was given to charitable causes. Ready for this? Nearly 80% of that $410 Billion was giving by individuals – people like you and me who wanted to make a difference. Now give yourself a pat on the back because you are one of those people making the world a better place. You are Altruistic but if you avoid this big mistake you can be even more Altruistic.
The Big Mistake: Giving Cash
Do not give cash (that includes writing a check). It may be easy. It may be quick. But it is short-sighted!
“But how am I supposed to give, you may be wondering?”
I’m glad you asked. If you are older than 70.5 years of age, the IRS has given you a wonderful gift. (If you aren’t 70.5 you can skip down to “I’m Youthful!” or keep reading to learn how you can encourage giving.)
“Okay, I’m already very skeptical because the IRS has only taken money out of my wallet, I don’t ever remember seeing a wrapped present with a bow on top.”
I understand the skepticism but the IRS allows individuals over 70.5 who are mandated to take a Required Minimum Distribution (RMD) from their retirement accounts to give up to a $100,000 per year directly to a qualifying charity without paying any income tax. In IRS lingo this is called a Qualified Charitable Distribution (QCD).
Think about this: the top Federal tax bracket is 37%. If you withdrew $100,000 from your IRA and were in the top tax bracket, Uncle Sam would collect $37,000 of tax (100,000 x 37%). That means your charity of choice would receive $63,000 to go and do good in the world! Great day. You’ve made an impact. Oh and by the way, you get a “below the line” charitable deduction if you are able to itemize which is harder to do with the new tax law (see your tax preparer for questions on that statement). But don’t do this!
Giving to Charity = The Best, Better, Greatest Way to Give
If you give directly from your IRA, the IRS does not tax – I think I need to say that again – the IRS does not tax – the withdrawal and you get credit towards satisfying your Required Minimum Distribution and the Charity receives $100,000 to go and do good in the world! High Fives all around! Now that’s being smart and making a big impact!!!
P.S. You do not have to give $100,000 for this to benefit you and the charity – it could be any amount. You can give to multiple charities not just one. And you can do it every year until the IRS changes the rules. This simple gift from the IRS allows your altruistic charitable giving to move “above the line” and save you money providing for a greater impact. Let’s all hold hands, I can already feel the world becoming a better place.
“But wait, I’m not 70.5 years old and I want to make a difference, is my only option giving cash?”
No. Believe it or not the IRS has a smaller gift for you. You can give appreciated assets (most often stock) or as some people call it “low-cost basis stock.”
First off, congratulations! If you have appreciated stock or low-cost basis stock it means you’ve made money! Now is the time to do a little celebratory dance. But oh, wait, Uncle Sam wants his cut of your profits. The highest long-term capital gains rate is 20%. Plus, don’t forget your possible state tax. In addition, there is the 3.8% Net Investment Income Tax that some folks are exposed to for a possible Federal tax hit of 23.8% when you sell your appreciated investment that did so well.
Let’s say you have a stock that you bought years ago for $1,000 and it’s now worth $10,000. If you give that $10,000 of stock to the charity of your choice, the Charity gets $10,000, you get a “below the line” charitable deduction and save yourself $2,142 in Federal Capital Gains Liability ((10,000 – 1,000)*0.238). If you sold the $10,000 stock, paid the Federal tax (and there could be state tax) the charity gets $7,858. That’s a win, but the smarter move is gifting the stock directly to the charity – the charity gets $2,142 more dollars and you get credit from the IRS for a $10,000 gift and not a $7,858 gift. The only LOSER in this scenario is the IRS – now, that is big time winning!
Thank you for reading this far. If you aren’t over age 70.5 and don’t have appreciated investments please by all means continue with your generosity and give by cash, check or whatever method you can – so the world wins and becomes a better place. Thank you for your generosity.
Be smart and talk to your tax advisor or financial advisor to understand if these strategies are right for you.
Disclosure: This information is intended for educational purposes only and should not be construed as advice. You should discuss your circumstances with a qualified financial professional prior to making any decisions.