Episode 28: What Works Wednesday: Year End Giving: How To Give And Get The Best Bang For Your Buck
December 6, 2023
Welcome to another episode of What Works Wednesday with Leland! In this insightful podcast, Leland shares valuable tips and tricks to optimize your finances and build the life you desire. As December marks the charitable giving season, Leland delves into strategic ways to make your donations count. Learn about the benefits of donor-advised funds, donating appreciated investments, and utilizing qualified charitable distributions from IRAs or 401ks. Discover how these tactics not only maximize the impact of your giving but also provide unique financial advantages. Tune in and gain the knowledge to navigate the world of charitable giving while optimizing your financial well-being.
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TRANSCRIPT
Leland Gross (00:00.938)
All right, welcome to another episode of What Works Wednesday, where I get to tell you guys different tips and tricks to optimize your finances so you get the most out of your money and build the life you desire. Today, I wanna talk about charitable giving because it's December when we're recording this. It's officially charitable giving season. It's the Christmas season, holiday season. It's time to be with our family and friends and it's time.
to think about what matters most in life. And oftentimes that's when we do all of our charitable donations are at the end of the year, if we're not giving them monthly. And most of the time when we do that, we just electronically give or we write a check, we just give cash is kind of how we typically do that. And we get a benefit from doing that. Not only just emotionally, we know we're happier when we give money away, there's study after study that show that.
but also we get an itemized tax deduction when we give money to charities. The first $600 is actually an above the line deduction, which is awesome. And then everything after that is a benefit if you itemize your deductions. But today I wanna highlight three different ways that you can give charitably with your money that will actually give you a bigger bang for your buck than just writing a check. So the first is to use something called a donor advised fund.
So what this is, is this is a very special account type. It's an investment account that you can open where when you give money to it, it's called an irrevocable donation. So you put money into this account and it's like you're giving to a charity. You get the tax break upon giving the money, the money goes into this account and it grows, however it's invested and it grows tax free. And then you get to give to charities as you want from that account.
And so you're not bound to the end of the year. You can just give money as you will. There's so many benefits to this. One, if let's say you're at the end of the year and you don't know who all you wanna give donations to, you don't have to, and I would encourage you, you shouldn't just give blindly to random organizations. So this allows you to put money into a charitable fund where you go ahead and you get the benefit, but then you can dole it out as time goes on as you need.
Leland Gross (02:24.682)
You can also get creative and let's say you fund the same amount every year, but it's never enough to quite get you to the point where you should itemize your tax deductions. Well, you could give all of it in one year to get a bigger benefit in one year and then spread out the donations over two. So there's lots of flexibility to it. Who this is great for would be a really high earner. A lot of times these have minimum contribution amounts.
of 10, $20,000. Not always, but sometimes. And so it's great for someone who really values charitable giving, who has a lot of cash and who may need to put a lump sum in for tax purposes, but still wants to give over time in different ways. All right. So that's donor advised funds. The second I would say is donating appreciated investments. So inside brokerage accounts. So
IRAs, Roth IRAs, things like that, but just your brokerage investment account. With stock, with ETFs, with shares of capital assets, when they appreciate and you let's say you need to, we'll just say buy a car. So you liquidate some investments to do that. When you take that liquidation, you owe what's called capital gains tax on the amount that's earned on your investment. So let's say you've put in $10,000.
the account has grown to 15 or the investments grown to 15,000. Well, whenever you liquidate that for your own purposes, you pay capital gains tax on that 5,000. Now it's not income tax. It's not the same tax threshold, but it's still tax, taxes tax. So we want to avoid that if we can. So what some people will do is as opposed to taking that money for themselves, they'll donate it.
So instead of writing a check to an organization from your bank account, you can take an investment and you can donate that. Now, how that works is you no longer have to pay taxes on those earnings. If you donate all of your shares of your investment, including the appreciated portion, the appreciated portion donates tax free. You don't have to pay taxes on it. And what's double is you actually still get the same amount of charitable donation deduction as well.
Leland Gross (04:50.486)
So it's kind of a double benefit. You avoid paying taxes on the earnings on your investment and you get the charitable donation deduction on your itemized deductions. Now, when the charity receives it, they can liquidate it if they want, and they don't have to pay taxes either because they're a nonprofit, so they don't have to pay income tax. And then additionally, on top of that, they can leave it if they want. They don't have to liquidate it.
So they can leave it, let it grow, and then when they need the money, they can liquidate it and they get more bang for your buck. They received 15,000, maybe it grows to 17,000 before they liquidate it and they get 17,000 tax free. So there's a lot of benefits to donating appreciated investments. Now, here's the kicker. If you were gonna write a check, basically take that cash, if you were gonna donate cash, but you donate your appreciated investment instead,
Well, then take the cash you were going to donate and put it back into your brokerage account and purchase that same investment. And what that's done is you've now kept your investment account the same. You add $15,000 of an investment, you donated it, you take $15,000, you put it back in the account and you invest it the same way. Your account still has $15,000 of that investment. But now you've lowered your taxes.
by donating it, they've received it tax free, and now your basis in that investment, so your contribution amount is higher. So you will owe less taxes later when you liquidate for yourself. So it's a great strategy to do that, to say, as opposed to writing this cash, if I'm going to send $1,000, as opposed to sending $1,000, I'm going to send $1,000 of an investment that's grown, and then I'm going to take the $1,000 of cash and repurchase that investment.
It's an awesome strategy. All right, third and final, this is for my older listeners or if you have parents who are in this situation or grandparents, you can encourage them to do this. You can use what's called a qualified charitable distribution from your IRAs or 401ks. So when we hit a certain age, right now it's anywhere between 72 to 75, depending on when you were born.
Leland Gross (07:17.07)
If you have an IRA or a 401k or a 403b, any of these accounts where you got a tax break earlier in life to contribute to this count, when you take money out of it, you have to pay taxes. So the government gives us these benefits all throughout our career. I put money in for my paycheck. It's a tax break to me. But then on the back end, when you receive the money, it acts like a paycheck. You have to get taxed. Well, at a certain age, the government requires
that we actually have to take money out every year. It's called a required minimum distribution. Because they're basically saying, hey, it's been really kind of us to give you this money, tax deferred your whole life, but now we want our tax money. You can't just defer this forever. So these distributions, depending on how much, are a real bummer because you may not need that money. You may not have wanted to take that money out. I have people who say if I didn't have to, I wouldn't have taken the money out.
And when you take the money out, you're forced to pay taxes on it. So if your RMDs are really high and you wouldn't have used them anyways, or you wouldn't have taken the money anyways, and it's causing tax pain for you, what you can do is you can do something called a qualified charitable distribution, a QCD, where basically you tell the investment company and the IRS, hey, as opposed to taking this minimum distribution that I have to take and giving it to me,
where I'm going to pay taxes, why don't you just take the same amount and give it to this charity over here that I really care about? What that does is you avoid paying taxes on it because you donated it. And again, they receive the investments tax free and so they can use it however they want. It's a great way if you really care about organizations or charities that are close to you. And if you're trying to lower your estate.
or you need to lower your taxes year over year, it's a great strategy to just say, hey, for my required minimum distribution, I wanna do a qualified charitable distribution and send it off. All right, so donor advised funds, donating appreciated investments and qualified charitable distributions, these are three ways that if you're thinking at the end of the year, I wanna give to charities or organizations or nonprofits that I really care about, these are great ways to do that.
Leland Gross (09:41.354)
in a way that gives you a better bang for your buck, and in some ways, in certain situations, can equip them to do more with your money. I always encourage you to talk to your financial professional and your tax professional before doing these things because some of these are complex strategies, but I want you to know that these strategies exist so that you can get the life you want from your business. All right, go forth and prosper.