Let’s Talk About Charitable Giving

The Holidays are upon us. This is often the time of year when we reflect on the things for which we are thankful and spend time with friends and family. It’s also a time when many of us make most of our charitable donations. That’s why, every November, I write a Friday Brief about giving. Typically, I write about different tools or techniques we can utilize to maximize the impact we have on the charities or ministries we support while also allowing us any tax benefits that may be available.

Lately, I’ve been getting a lot of questions on the topic of generosity and I’ve found myself suggesting a specific tool that Crystal and I use when we do our own giving. So, I thought it might be helpful if I shared a bit about how Crystal and I think about and do our giving each year.

At the beginning of our marriage, Crystal and I decided that each year we would give away at least 10% of our gross income. As I’ve written in the past, we have lots of things competing for our dollars but giving generously is something that’s important to us and something we hope will be important to our kids. Each month we have a regular amount drafted from our checking account to our donor advised fund. As a business owner, my income looks a little different each year, so we often top off our fund in December to make sure we reach our goal.

A donor-advised fund is like an investment account created for the purpose of supporting charitable organizations you care about. You get a tax deduction in the year you make contributions to your fund (even if the cash is not yet granted to your charities), subject to the normal charitable giving rules, and you can use the cash in your fund to recommend grants to virtually any IRS-qualified public charity over any time frame you choose. Crystal and I have automatic, monthly drafts that go out from our donor advised fund to the different organizations we support but we also try to accumulate a small balance in our fund that we can use for occasional one-time gifts.

I really appreciate the simplicity of doing most of our giving through one account. It makes things a little easier at tax time and keeps us from having to constantly manage multiple monthly bank account or credit card drafts to different charities. I will say that there can be some downside to making our charitable giving too easy. Having our giving on autopilot can make it an out-of-sight, out-of-mind process which is not what we’re going for. That’s why we love the quarterly and annual giving statements we receive from our donor advised fund. They’re a handy way to review our regular giving and an easy way to share the experience with our kids.

You can certainly contribute cash to a donor-advised fund like we do, but they also work well if you plan to implement other giving strategies.  For example, you can contribute appreciated shares of stocks, bonds, mutual funds or ETFs that you’ve owned in your non-retirement accounts for more than one year. Once your donor advised fund receives the appreciated asset it can sell it tax-free, so that no one is required to pay the usual taxes on the capital gains, and you can grant the proceeds to multiple charities over different time frames. This can be a great strategy if you own a stock that has appreciated in value and you’re ready to sell. It could be stock from your employer or a big tech stock you bought years ago. In this scenario, you could donate the appreciated shares to your donor advised fund and immediately use the cash you would have given to charity to replenish your portfolio. Doing so means you’d potentially reduce the tax bill due when you sell your newly purchased shares in the future. A similar strategy could work if you need to reduce your exposure to stocks or bonds in general but don’t want to pay taxes on the appreciation as you rebalance your portfolio.

Another possibility that may be worth considering is called lumping and clumping. The ability to deduct the amount of your charitable gift from your taxable income may not be your primary reason for giving, but it can be a nice side benefit. You could even think about it in terms of the deduction allowing you to give more than you normally would for the same cost.  With that said, the 2017 Tax Cuts and Jobs Act significantly reduced the number of taxpayers who are eligible to claim itemized deductions because it substantially increased the standard deduction while also restricting or eliminating some of the available itemized deductions. In order to itemize in 2021 your total deductions need to be above the increased standard deduction amount of $12,550 for singles and $25,100 for couples (a little higher if you’re 65 or older.) That means that many people that were used to getting a tax deduction for their charitable gifts may no longer receive one.  Lumping and clumping involves timing certain deductions to hit in one year so you can itemize and then simply taking the standard deduction the next.

Here’s a quick example.  Let’s assume a married couple without a mortgage whose only remaining itemized deductions are their state and local income taxes (“SALT”), capped at $10,000, and their charitable giving. If they planned to give $10,000 to their favorite charity in 2021, they most likely wouldn’t be eligible to itemize their deductions as their $20,000 in charitable giving and SALT would be below the $25,100 standard deduction. In other words, there is no tax benefit from the $10,000 in charitable giving, because this taxpayer would still claim the (higher) standard deduction with or without the gifts.

However, if they chose to do all their 2021 and 2022 giving in 2021, their potential itemized deductions would increase to $30,000 ($10,000 in 2021 giving, $10,000 in accelerated 2022 giving and $10,000 in SALT.)  That’s above the $25,100 standard deduction so they would pick up an extra $4,900 in tax deductions for the 2021 tax year. In 2022 they probably wouldn’t itemize but they would still be eligible for the higher standard deduction. In this scenario, while the taxpayer is giving the same total dollar amount to charities over a two-year period, they are generating an additional tax benefit beyond the standard deduction they would have otherwise taken.

That may sound like a good idea, but what if you don’t want two years’ worth of giving to go to your charity all at once.  That’s where a donor advised fund could come in handy. The couple in the above example could do all their 2021 and 2022 giving to their donor advised fund in December of 2021, but still gift the cash from their fund to their charities of choice according to their normal schedule.

Finally, a donor advised fund can be an ideal tool if you are selling a business or piece of land are interested in lowering your tax bill and giving to charity. This gets complex quickly but can be well worth the effort. Let us know if it’s something you’d like to explore.

Whether you’re lumping and clumping, donating appreciated shares of stock or simply looking to streamline your giving, a donor advised fund may be worth considering.

Please note that these strategies may or may not be appropriate for you and they all come with some specific rules that need to be followed so check with your CPA or one of us at Beacon first.

As always, let us know how we can help.

 

Geoff Hall, CFP®
[email protected]

My wife, Crystal, and I have been married for nine years and have two kids, Cooper (7) and Rhodes (5.) When I’m not spending time with them you might find me downtown serving at our church, pushing my limits during a mountain bike ride or having coffee with a friend in the Five Points area. I've been practicing wealth management for 25 years and I'm thankful for the privilege of shepherding my family of clients through the ups and down of the markets and of life for that matter.