Why should you never write a check to your favorite charity? Because there are better ways to support the causes that you care about. Watch this video to learn about two strategies that will mutually benefit both you and the organizations that do good for others.Click Here for the Full Video Transcript
Hi, I’m Brandon Kraus, Vice President and Wealth Advisor at GreenUp Wealth Management.
At GreenUp, our mission is to positively impact and transform people’s lives. That’s why we love the fact that there are over 1.5 million 501(c)(3) non-profit organizations in the United States working to improve their communities.
So why would I recommend you never write another check to your favorite charity? Because there are better ways to support the causes that you care about.
Let’s look at two strategies that will mutually benefit both you and the organizations that do good for others.
Before we get started, let’s talk about the Tax Cuts and Jobs Act that Congress passed at the end of 2017. This law doubled the Standard Deduction, which is the amount of money that taxpayers can deduct from their taxable income if they don’t itemize their deductions. How can you reduce your taxes by making donations to charities when you don’t itemize your deductions?
The first thing you can do is gift highly appreciated stock to a 501(c)(3) organization. Here’s an example: My current iPhone is the iPhone 12 and I have here this ancient iPhone 3 that was released on July 11, 2008. Now if you would have bought $1,000 worth of Apple stock when this 15-year-old antique became available your Apple stock would have been worth about $18,394 by the time my current iPhone 12 became available on October 23, 2020. If you were in the 20% capital gains tax bracket, buying and then selling your Apple stock between iPhone models 3 and 12 would generate a capital gains tax of $3,479. After paying the taxes, you would be left with $14,915.
Congratulations! You made a successful investment in Apple and feel like you want to pay it forward, so you write a check for your net profit of $14,915 to your favorite charity. You don’t get a tax break, but you still feel good about helping an organization you believe in.
But wait- what if you gave the stock to your favorite charity instead of selling it? Assuming the charity is a 501(c)(3) organization, it is exempt from paying taxes. By gifting your Apple stock to the charity, the charity can sell that stock and net the full value of $18,394 compared to receiving your check of $14,915. You’re happy because you avoid capital gains taxes. Your favorite charity is happy because it ends up with more money to benefit the community.
The second strategy is using what’s known as a Qualified Charitable Distribution, QCD. Now with a QCD, anyone over the age of 70 ½ with an individual retirement account can make charitable donations directly from their IRA to a non-profit organization. This can satisfy your required minimum distribution, and is excluded from your taxable income. Let’s look at an example of how it works.
Let’s say your required minimum distribution for this year is $25,000 and you are in the 24% tax bracket. After withdrawing money from your IRA and paying taxes, you are left with $19,000. Since your income increased quite a bit from last year you now have to pay higher premiums for your Medicare Parts B and D, as well as pay taxes on a higher percentage of your Social Security Income. You’re still doing fine financially and since you do not need the remaining $19,000 from your IRA, you decide to write two checks for $9,500 each to your two favorite charities.
What would happen if you made Qualified Charitable Distributions instead by sending $12,500 to each of the two charities directly from your IRA? Each charity would get $3,000 more, you would have satisfied your required minimum distribution requirement, and because your income did not increase, your Medicare premiums and taxes on your Social Security income would remain the same.
Gifting highly appreciated stock and Qualified Charitable Distributions are two ways to support the organizations you believe in while providing you with tax benefits, especially if you don’t itemize your deductions.
There are many other strategies to consider that may benefit you as well as your favorite charities. Talk to your GreenUp Wealth Advisor about which charitable giving strategies are applicable to your financial situation.
I’m Brandon Kraus. Thanks for watching!