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The happiness in retirement podcast is a holistic financial planning show that teaches you how to maximize your wealth and your happiness, and its for anyone who wants to squeeze all the juice out of their life - and their money.
Let's say that you pay $10,000 for Apple stock and that Apple stock is now worth $100,000. If you sell that Apple stock, you're going to pay tax on $90,000 in gain and that gain could be potentially 20 to 30% of the gain. But instead, you can donate this Apple stock to a donor advised fund. Again, poof, the gain disappears. You don't pay any tax on the gain. The stock with the gain goes to the donor advised fund. The donor advised fund, because it qualifies, can sell the Apple stock and not pay any tax on the gain either. Again, win-win. If you lose the ability to itemize your deductions and therefore take a tax break for your charitable donations after the Tax Cut and Jobs Act was passed in 2018, if you're like a lot of people you did, Today, we're going to talk all about QCDs and DAFs. That's qualifying charitable donations and donor advised funds in layman's terms. I'm Bill Del-Sette, host of the Happiness and Retirement Program podcast, founder of Del-Sette Capital Management, registered light planner, certified financial planner, and lover of life. Thanks for tuning in to the Happiness in Retirement Program podcast. If you like this podcast, tell your friends, hit subscribe or send us an email. Visit us at www.happinessinretirement.com or delcedi.com with a hyphen between the L and the S. Well, today we're going to talk about two charitable giving strategies that might just help you still get a tax benefit from making charitable donations, even if you can't itemize your deductions. But before we get into that, it would be helpful to talk about the tax landscape right now and do a little tax 101 workshop here within this podcast before we get into these two charitable giving strategies. As you probably know, you can either itemize your deductions on your federal tax return or take what's called the standard deduction. whichever is greater. Now itemized deductions are things like charitable donations, mortgage interests, and real estate and income tax, state income tax, up to $10,000. Also potentially some medical expenses are deductible based upon how large those medical expenses are. So you add up your itemized deductions, and if they're higher than your standard deduction, you take the itemized deduction. And if they're lower, you take the standard deduction, which is available to everyone, whether or not they itemize. Well, the 2017 Tax Cut and Jobs Act that went into effect in the 2018 tax year did a couple of things that discouraged charitable giving compared to prior tax law. In fact, some say a study was done actually that says charitable giving fell by $20 billion in 2018, the first year the act was implemented. So here's what it did and here's how it could impact your ability to itemize your deductions. First of all, it increased the standard deduction to $27,700 for married filing joint. That is a very high increase from what it was prior to the passing of the Tax Act. The second thing it did was it capped the amount of state and local income and real estate taxes that could be deducted on your return as an itemized deduction. So increase in the standard deduction significantly, reduction in the amount of itemized deductions you can take or even elimination of other deductions cause many people to not itemize anymore. And therefore, if they gave to charity, not get any tax benefit. In fact, a study found that over 20 billion in charitable donations were not made in 2018, the first year of the Tax Cut and Jobs Act implementation. And that was a study done by researchers at Indiana University. So that's a big deal. Now, people who give don't give just for the tax break, but it certainly helps. So if you don't get a tax break, you may not give or you may not give as much. just because you don't get as much benefit anymore. So how can you still potentially optimize your finances, get a tax break and help your favorite charities? So first, let's talk about QCDs or qualifying charitable donations. Once you reach a certain age, you must take money out of your IRA in the form of something called a required minimum distribution, because it's time to pay the government back for all of those years of tax deferral within that traditional IRA. RMDs can increase every year because that required minimum distribution goes up with the account value and also with your age. So if you don't need that IRA income, you have other sources of income, and you're forced to take money out of your IRA every year, well, that could be problematic. In fact, it piles this IRA income on top of the rest of your taxable income. maybe even pushing you into a higher tax bracket. Well, if you are over 70 and a half, whether you itemize your deductions or not, you can take a qualifying charitable deduction. or make a qualifying charitable donation from your IRA, which is a direct transfer from the IRA custodian to the charity. It cannot be, a check cannot be made payable to you in your name. If you follow the rules, then you and your spouse can take a qualifying charitable donation for up to in 2025, $108,000 a piece. That means you can give up to $216,000 away combined in any tax here by doing a qualifying charitable donation. And guess what? You don't have to itemize to get the tax benefit. Now, if you have to take required minimum distributions, guess what? This QCD, as it's known, also qualifies in satisfying your required minimum distribution. That is a big perk. Now, not every charity qualifies, okay? It has to be a 50C3 organization. That's just, uh, telling us that the IRS has given the charity nonprofit status. Okay. So it has to be a 503 organization. Okay. So, uh, QCDs great, great way to give to charity and also get a tax benefit. Uh, you don't want to do small amounts like you wouldn't, you don't want to call your custodian every week. If you say, let's say you give systematically weekly or biweekly to your church. Uh, you don't want to call and you know, request $50 checks made payable to your church every week. You drive the custodian crazy. Uh, I'm not even sure if every custodian allows you to make small QCDs like that. What you can do, however, is you can figure out how much you want to give to your church for the year and you make that QCD for that amount all at once. Say at the beginning of the year, satisfy your required minimum distribution and give to your church what you would normally give weekly or bi-weekly or monthly all in one shot and you're done. It's pretty good, huh? Good deal. By the way, if you were to take money out of an IRA in your name and deposit that money into your bank account and then give it to the charity, you're going to pay tax on that amount that you took out. So the real benefit in this QCD is that, um, the check is made payable directly to the charity. So if you took $10,000 out of your IRA, and let's say that was your required minimum distribution, and you're in the 30% tax bracket, 3000 of that $10,000 IRA withdrawal goes to tax. You only have 7,000 to go to the charity. If you do a QC, the full boat goes to the charity. $10,000 doesn't show up in your tax return. So it's a win-win. Okay. So those are QCDs have to be 70 and a half to qualify has to be a direct transfer of the money to the charity. Can't be in your name. The charity has to be a qualifying charitable organization in the eyes of the IRS up to $108,000, $108,000 a year, a husband and wife. So yeah, you can, you can give a lot of money from your IRA and pay zero tax on this money, by the way, that you got tax deferral and a tax deduction for when you originally put it in. It's a good deal. Okay. So now let's talk about donor advised funds, which are available to anyone Add any age you don't have to be seventy and a half you don't even have to have an ira in fact it doesn't work with ira. Basically make a contribution to a donor advised fun get an immediate tax deduction and then decide later. which charities to support. And in the meantime, the money in this fund grows tax free. So these donor advised funds are incredibly flexible. For example, you can contribute a large amount in one year to maximize your tax deduction. Let's say in a year when you have a really high taxable income, maybe you received a bonus, you sold a property, but then you get that tax deduction all in one year, but then you spread out your donations to the charities you support over several years. And setting up a donor advised fund or a DAF is simple. Many institutions like Fidelity or Schwab offer low cost options, but it's important to understand the fees and minimum contribution requirements. So how do you decide between a QCD and a DAF? Well, it depends on your situation. QCDs are ideal for retirees 70 and a half or over. who wants to reduce taxable income while meeting the required minimum distributions. On the other hand, DAFs work well for individuals or families of any age who want to structure long-term giving. Plus, and this is a big plus, you can use appreciated assets like stocks, to fund a donor advised fund, which avoids capital gains taxes for you. Here's an example. Let's say that you pay $10,000 for Apple stock. You know, many years ago, I'm just picking a number off a bus and I'm just picking a stock. And that Apple stock is now worth a hundred thousand dollars. If you sell that Apple stock, you're going to pay tax on $90,000 in game And that gain could be potentially 20 to 30% of the gain. You know, maybe call it $18,000 goes to tax, but instead you can donate this Apple stock to a donor advised fund. Again, poof, the game disappears. You don't pay any tax on the gain. The gain, the stock with the gain, goes to the donor advised fund. The donor advised fund, because it qualifies, can sell the Apple stock and not pay any tax on the gain either. Again, win-win. Pretty cool. Okay. Now you can use a qualifying charitable donation to fund a donor advised fund. The tools are distinct, but they can complement each other in a broader giving strategy. Here's one approach. If you're over 70 and a half, use a QCD to handle your RMDs and fund immediate giving. Then use a donor advised fund to plan for future more flexible contributions. Do this in a year where you expect to have high taxes even better. Another tip is to bunch your donations. Let's say you want to maximize deductions in a high income year, contribute a large amount to this donor advised fund, then distribute those funds to charities over the next few years. Of course, you want to consult your financial advisor. Of course, we or they can help you integrate QCDs and DAFs into your tax planning and financial goals. So there are a couple of other strategies to consider. And one is to combine a Roth conversion with a contribution to a donor advised fund. Here's how that works. Let's say hypothetically that you want to gift $100,000 to a donor advised fund. Well, let's assume you do that, but in the same year and ideally, right, you've got an appreciated security, use that capital gain and that, that security goes away. Poof. You don't pay any tax on the security. It's transferred to the donor advised fund. So now you've got a hundred thousand dollar deduction on your tax return. Same year. Do a Roth conversion for $100,000. Now a Roth conversion is taking taxable, taking money that's tax deferred in your traditional IRA, taking out of the IRA and putting it into a Roth IRA, following the rules to make that happen, right? You got to follow the rules. you pay tax on that amount that you take out of the traditional IRA and convert to a Roth. So without this donor advised fund contribution, you take a hundred thousand out of your traditional IRA in the form of a Roth conversion, you pay tax on the $100,000 conversion. But because you've made a donor advised fund contribution in the same amount, you may, may be able to offset that conversion dollar for dollar. and pay no tax on the conversion. Pretty cool, right? Combining donor advised fund with a Roth conversion. Or how about this? Now, Roth conversions don't satisfy required minimum distributions, but qualifying charitable donations do. So do a QCD up to the amount of that required minimum distribution, okay? Then do a conversion. You have to do the required minimum distribution first. Those are the rules. Then do the Roth conversion and simultaneously take taxable money and put it into a donor advised fund or better yet, better yet, take a highly appreciated security and put it into the donor advised fund. Wow. You don't pay tax. on the required minimum distribution because it's a qualifying charitable donation and you potentially don't pay any tax on the Roth conversion and And you potentially don't pay any tax on the highly appreciated security. And guess what? The charity doesn't either. So, you know, we're getting into some complicated tax scenarios, but that's how it might potentially work. As always, you should talk to your tax advisor before taking on any strategy. And ideally you want to talk to your tax advisor before the end of the year when they're buried and they can't help you because they don't have the time. Tax planning, like financial planning, is an ongoing I mean, it just, it never ends since we're talking about taxes and tax benefits and charitable donations and things like that. It's also helpful to note that anytime you have a financial event in your life, you should let your accountant, your tax accountant know, so they can help you out. Um, you don't want to be caught at the end of the year with a big tax surprise because you forgot to tell your accountant that you sold the property or you got a big raise, or you, you know, you received your, you know, your restricted stock units vested and you didn't pay enough withholding on them. A good accountant will be proactive, will help you plan for these kinds of events, but they can't help you if they don't know about them. Okay. That's also where financial planners can come into the equation because your financial advisor can also coordinate with the other professionals in your life. So there we have it. Qualifying charitable donations and donor advised funds. Talk to your advisor, talk to your accountant about these two really powerful tools. Donating appreciated securities to a donor advised fund could really help you out as well. So I hope you enjoyed this episode of the Happiness in Retirement program. If you did, hit subscribe, share it with a friend, visit us at happinessinretirement.com. Or if you have any questions, hey, shoot me an email. Bill at happinessinretirement.com, all one word. Tune in next week where we talk about Swedish death cleaning. What the heck is that? Well, tune in. It's going to be a lot of fun. I think it's not quite as the subject is not as depressing as you'd think. In fact, it's really catching on around the world. So definitely it'll be an interesting conversation. We hope to see you then. Again, any questions, reach out and we'll see you soon. Bye bye.