‘Tis the season to give and to get back. Americans give billions of dollars to 501(c)(3) non-profit charitable organizations throughout the year. While most of us know that you can get a tax deduction for giving, do you know how to maximize that tax deduction? In this webinar, Alan Clopine, CPA, Chief Financial Officer and Chairman of the Board at Pure Financial Advisors, outlines seven sophisticated ways to boost your tax savings when donating to charity.
Outline
- 00:00 – Intro
- 00:46 – Total US Charitable Giving from Individuals, Foundations, Bequests, and Corporations
- 01:21 – 5 Types of Giving: Cash, Non-cash, Appreciated Assets, Directly from IRA, Split-Interest Gifts
- 02:27 – Where to Deduct: Itemized Deductions vs. Standard Deduction
- 04:19 – Deduction limitations
- 05:22 – Pros and Cons of Bunching Deductions, Gifting Appreciated Assets, QCDs
- 06:29 – Bunching Donations Explained
- 08:04 – Gifting Appreciated Property
- 08:45 – Gifting Appreciated Stock
- 11:31 – Qualified Charitable Distributions Explained
- 14:59 – Donor Advised Funds Explained, Split-Interest Gifts
- 18:44 – Charitable Remainder Trust Explained
- 24:03 – Charitable Gift Annuity Explained
- 25:57 – When to Give
- 28:06 – How to Set Up Your Charitable Gifting Plan
Questions Answered
- 32:18 – Can I contribute IRA money to a donor-advised fund?
- 33:20 – What kind of supporting documents do I need if the IRS audits my return?
- 35:17 – I will take my first required minimum distribution in 2023. If I want to do qualified charitable distributions, do I just call Vanguard and tell them to donate the RMD to all my favorite non-profits?
- 37:17 – How much am I allowed to deduct for non-cash donations to Goodwill and Salvation Army?
- 42:17 – Can I deduct the amount I spent at a silent auction at a local charity as a charitable deduction?
- 44:29 – Schedule a Tax Reduction Analysis
- 45:55 – Would real estate be a good asset to put in a charitable remainder trust?
Transcript:
Andi: Hello and welcome and thank you for joining us for this Charitable Giving webinar with Alan Clopine, CPA. Alan, thank you so much for taking the time to walk us through these strategies to give to charity while maximizing the tax benefits of doing so.
Al: Well, thank you, Andi. And it’s great to be here with all you guys. We’re talking about one of my favorite subjects, which is charity. I like to give time and money. Today we’re going to focus on the money part, how to get tax deductions. What are the strategies that make sense? Because if you’re going to give, not only do you want to feel good about the charity you’re giving to, but you also want to make sure you’re getting a benefit, at least in terms of a tax deduction. So that’s what we’re going to talk about today, charitable giving, steps on informed donations. So first of all, how much are we giving? Gosh, almost $500,000,000,000, half a trillion is the amount that charities are getting from us, United States citizens. That was in 2021. And who’s giving it? Well, 2/3 are individuals. You and me are giving 2/3 of what charities are getting, what they’re receiving, right. The rest is foundations, bequests, corporations. So today we’re going to focus on the individual, the tax deductions and so forth. So first of all, how do you give? Where do you give? How do you make a gift? So some of this will be basic, some of this will be more complicated. So I’m going to try to be where you all are in terms of- some will be simpler, some will be more advanced. But as far as giving, you can give by cash or check, right? We’re going to call that cash, just as a singular term throughout this presentation. You can give non-cash items. So things like, I don’t know, old clothes and shoes to Goodwill, that sort of thing. You can give appreciated property, appreciated stock, appreciated real estate. Right. There’s some advantages there. In some cases, you can give directly from your IRA. That’s called a qualified charitable distribution. That’s when you’re 70 and a half and older. And you can do split interest gifts. What the heck is that? Well, that’s when you give a gift to charity, they get a benefit, but you also get a benefit back. It’s a little more complicated. We’ll kind of save that towards the end. But let’s start with some of the basics here. And that first of all, is where do you deduct your charitable donation? It’s an itemized deduction. Itemized deductions, if you’re familiar with your tax return, probably most of you are, there’s income, there’s deductions to income, it’s called, and to get to adjusted gross income. Then there’s itemized deductions to get to taxable income. Taxable income is what you pay tax on. So itemized deduction, that’s going to be things like medical. In certain cases, if you have enough medical to get over the 7.5% of income threshold. It’s going to be property taxes, state taxes. You’re only limited to $10,000. It’s going to be your mortgage and it’s going to be charity. Okay? So that’s what’s in there. Now you get to pick- itemized deduction or standard deduction. You always take the higher of the two. So in terms of a standard deduction, in 2022, married, filing jointly, $25,900, that’s how much you get even if you have zero itemized deductions, right? If you’re single, married, filing separate $12,950. So what does that tell us? That tells us that you’re going to need to have a lot of mortgage interest or a lot of charity, taxes, maybe a lot of medical even to hit this $25,900 amount. Now in 2018, these standard deduction amounts were approximately doubled. So they used to be a lot smaller. So now it’s harder to itemize, which is why this presentation is so important right now. Because a lot of people are making charitable deductions and not getting any benefit because their standard deduction is lower than these amounts here. So another limitation to be aware of is when you give to charity, when it’s cash, being cash or check, remember when it’s cash, you’re limited to 60% of your income. So $100,000 of income, 60%, $60,000, that’s the most that you can deduct as a charitable deduction in that particular tax year. When it’s appreciated stock, then you’re limited to 30%.
So $100,000 of income, 30% is $30,000. That’s the most that you could deduct in this particular tax year. If you have too much in contributions, then you can carry over any additional amounts of future years, but only for 5 more years, okay? So when you make that donation of appreciated stock or cash and you’re over the limits, you can deduct in the current year and then 5 more years. So 6 years total. So when you make a very large donation, you want to make sure you do a little tax planning to make sure you’re going to get full benefit of that deduction. OK, let’s start talking about some strategies. Because the standard deduction is very high and a lot of people are not getting benefits from their charity, so how can you actually get some benefits? So here’s 3 strategies right off the bat that we’re going to talk about. We’re going to talk about bunching, gifting appreciated stock and QCDs or qualified charitable distributions. Bunching is simply when you’re, instead of making contributions this year, next year, maybe I try to bunch them all into one year, make contributions this year, none next year. What does that do? Well, it puts more donation deductions in a particular year to get me over that standard deduction. Gifting appreciated stock is very nice because you give away whatever stock, whatever it’s worth at the date of the donation is your deduction and you don’t have to pay taxes on the gain. And then finally QCDs, qualified charitable distributions, that’s when you’re over 70 and a half, we’ll get into that. That’s actually a great strategy as well. So let’s focus on bunching to start with. This is probably the simplest strategy there is out there. Doubling your donations in one tax year, don’t donate the next year. So that works pretty well, except when you’re used to giving, like, say, your church every month. Because here’s what I’ve seen happen is people double up in December or whatever, they make their contributions for this year and next year for the church. And as soon as you do that, then you’re going to get letters, okay, well, last year you made $20,000 donation to the church. How about this year? And you’re saying, wait a minute, that was for this year and next year. So that can be a little bit confusing. But to me, where that works well is if you typically make donations right at year-end, then maybe this coming year, right, you go ahead and make your ones in December and then the ones that are going to make next year, right? Maybe you make those as well, right? And then you don’t do anything the following year. And then the next year you make them both in January. So you’re roughly one year apart when you do it. But you’re kind of doubling up on your donations. So that can be really effective when you’re right near that standard deduction. Because if you’re trying to just get over it to get some benefit, that could help you get some benefit. Or if you’re just under it, right? If you’re just under it, then maybe you have enough in bunching to get over that standard deduction to get itemized deductions. It’s a great strategy with donor-advised funds, but we’ll get to that in a moment. OK, gifting appreciated property.
This is a very good one because when you’re giving like a stock that you bought and at the date of that donation is your tax deduction. So you got stock, $10,000 stock. That’s what it’s worth, not what you paid for it. That’s what it’s worth. You get to deduct the full $10,000 against your tax return. And you don’t have to pay the taxes on the gain because typically you’d sell that stock, you’d pay tax on the gain, and whatever is left over, you donate. You get a deduction for what you donate. So let me give you an example here. So this is that $10,000 stock that I had mentioned, okay? And let’s say you paid $1000 for it. So you have a $9000 gain. So let’s look at the possible benefits that you get from donating this stock. So first of all, $10,000 stock, let’s go with the 37% top federal tax rate. I’m not considering states here. If you’re in a high tax state, then the benefit will be even better. But 37% of $10,000, you get $3700 as a tax deduction. So that’s- you’re going to pay $3700 less on your tax return as a result of this donation. But then you also avoided capital gains, right? Remember I just said $10,000 is the value, $1000 is your purchase price. You got a $9000 gain.
The tax rate on tax gains, capital gains are taxed at either 0%, 15% or 20% depending upon your tax rate, right? And then there’s something called a net investment income tax which kicks in for a single person when your income is over $200,000, married $250,000. Then all of sudden a it’s not just that 0%, 15% and 20%, you have to pay an extra 3.8% on passive income, which includes capital gains. So I’ve used 23.8%, the 20% plus the net investment income tax. So that applied to the gain is $2142. So what’s your benefit? Well, I saved taxes and I didn’t have to pay taxes that I would have otherwise paid. So it’s a $5800 benefit for doing this $10,000 donation. Now, if in tax state that has a 10% tax rate, then obviously these are bigger still. So this can be a great strategy. In fact, for all of you that have appreciated stock in your non-qualified, non-retirement account, this does not work in your IRA or your Roth. It has to be outside of retirement account. You have appreciated stock outside of your retirement account. It’s always better to give the stock than it is cash or check because the cash or check, you’ve already paid taxes to get it into your checking account, number one. Here, when you give a appreciated stock, then you don’t have to pay the tax on the gain. And you may not know this, but virtually every single charity that I’ve ever seen will accept stocks, right? And so they get the appreciated stock, they sell the stock, but they don’t have to pay the tax either because they’re a nonprofit. So it actually works out pretty well for everyone. Another really good one, which is, I don’t know, maybe 10 years old or so, maybe not quite that old, qualified charitable distribution. We like to say QCD. Accountants are known for abbreviations, so QCD is what you may hear. So this is giving directly from your IRA. So you have a donation you want to make. It comes from your IRA directly to the charity. You don’t get it yourself. IRA to charity. It’s a direct transfer to charity. Couple caveats though is you have to be 70 and a half to be able to do this. So it doesn’t- not everyone qualifies. But as we age, I’m aging, we’re all aging when we get there, right? Or maybe we’re already there, you can do that directly from your IRA and then when you are 72 and older, you have to take a required minimum distribution. Another acronym. RMD. Right? And this counts, this gift directly to charity counts as your required minimum distribution. So that actually works out pretty good. You can do $100,000 per person. If you’re married, that’s $200,000 that you can give directly to charity. So that’s a pretty good thing. If your required minimum distribution is $40,000, great. You can give it all of it directly to charity, no problem. Can you do more than the $40,000? The answer is yes, you can do $100,000 if you want. You can do $20,000 if you want. It doesn’t really matter how much goes to charity. You know that when you’re of required minimum distribution age, 72 and older, you’ve got to give whatever that minimum is, in my example, $40,000. You can give all of it to charity, part of it to charity. You can give more to charity up to this $100,000. Why is this a benefit? Well, what happens is when you give the money directly to charity, it does not show up on your tax return as income. Right? Now you don’t get a tax deduction either because you didn’t pay tax on what you withdrew. So on the surface it would seem like, well, what’s the benefit? You don’t have income. You don’t have a deduction- taxable income, that’s out. It’s about the same. Well, not necessarily, because the more adjusted gross income you have, the more likely your Social Security is going to be taxable. The more likely that you’ll have your rental property losses minimized, the more likely you’ll be subject to net investment income tax and on and on and on. There’s a lot of things that tie into adjusted gross income. If you can keep the required minimum distribution off your 1040, page one of your tax return, that can be a pretty good thing. Okay, now maybe let’s get a little more advanced now. Some of you kind of said, I already know that stuff. That’s good. So let’s kind of go the next level. So there’s a couple of really interesting strategies. One is called a donor-advised fund, where you can actually take future contributions and get the tax deduction right now. And then there’s a split interest gift. What’s that? Now that’s when you give something to charity, but the charity gives back to you as well. So you’re splitting the gift between the charity. So let’s start with donor-advised fund. And don’t freak out. There’s a lot to this, but it’s not really that complicated. So we start with a donor who then contributes cash or property, appreciated stock, could even be real estate, to a donor-advised fund. Donor-advised fund is an account that you control. You get to decide how it’s invested. You get to decide how it gets doled out to charity. What happens in the current year is you give the cash or property to the donor-advised fund. Then you get a tax deduction for everything you put in there. Like, let’s say, for example, you have a very high income year. You have a big bonus or stock option income, or you sold a business or you sold real estate or whatever, and you want a big tax deduction. So what you do is you might look and say, well, you know what, I want to give $5000 away for the next 10 years. Why not just take the deduction right now in the year where I need the deduction? 10 times $5000, $50,000. Why not put $50,000 into a donor-advised fund, take the full deduction in the year that I need it? So it’s a great strategy. You’re trustee, meaning you control the investments. You also control what charities get what amounts. What’s kind of cool about this is you don’t have to distribute to charities right away. You could just let this sit for a while, or you could start distributing as quickly as you want. There’s no minimum, there’s no maximum in terms of how much you distribute. So if you go with my simple example, maybe you want to take that $50,000 and $5000 each year goes to the charities of your choice. You do not have to decide the charities when you set it up. You decide it annually each year. Now remember, you got a tax deduction when you made the donation. So by the time you’re writing checks to charity, there’s no additional deduction because you’ve already taken it. But this account- this account is invested. It could go up, it could go down. That’s just the way investments go. If it goes up, charities will get more. If it goes down, charities will get less.
But you already got the original tax deduction. So, as you can imagine, because of the standard deduction versus itemized deduction, if every year the itemized deduction is here and standard deduction is here, or I should say the other way around, standard deduction is higher, then if you do donor-advised fund, all of a sudden your itemized deduction might be much higher. You might get a very nice benefit in that one year.
And a lot of people use this not only for years where they have high income, but when they want to bunch- when they want to bunch contributions into a particular tax year. Instead of never getting a benefit, maybe every two, 3, 4 years, they put money into a donor-advised fund. Their itemized deductions are higher than the standard. So they get a benefit. Right? So that’s a great way to go. Today, you get the tax deduction. In the future, then you get to dole out to the charities of your choice. And if you pass away, your spouse takes over. If you both you pass away whatever trustee, successor trustee that you designate, maybe your kids or whoever, then would continue the donations, right? So it’s a pretty good vehicle. If you give appreciated stock to here, even better yet, as I mentioned, because you’re not paying tax on that gain. So anyway, a lot of people do this. This is actually a really common strategy. Once you know about it and understand it, I think in many, many, many cases, it has a really good application. All right, let’s talk about something that only applies to a few. However, the few that it applies to is big. So this is what we would call a split interest gift, meaning that I’m giving to charity, but I’m getting something back as well. This particular strategy is called a charitable remainder trust. There’s c charitable annuity trust, there’s charitable lead trust.
They all have different benefits, different pros and cons, but this is a common one that we see people use, particularly if they have appreciated real estate that they don’t want anymore. They want to sell it, but they don’t want to pay taxes on it. So how does this work? Well, the first thing is you’ve got to set up a trust, you got to set up a CRT, and that typically is done with your attorney. They’re not cheap. It could be $4000, it could be $5000. In some cases, you can go to organizations that you can use their prototype and don’t have that expense. But that’s the first thing. You set up the trust itself. Then you transfer the asset into this trust. Again, the asset that you put in here would be something highly appreciated, like real estate. Or it could be stock if you have- like, let’s say you bought Apple stock right at the right time, right? And for this and now it’s worth that. You’d like to sell and diversify, but you don’t want to pay all the tax. That might be something that you want to put into this trust. Now what happens with the trust is there’s a computation whereby annual payments or quarterly or monthly depending upon how you set it up, come back to you for the rest of your life. So I’ll say that again. You put an asset in the trust, the trust sells it, trust pays no tax because it’s tax exempt, and you get payments back to you as long as you are living. Okay? Whenever you pass away, charity gets the balance. That’s why this works this way because there’s a charitable benefit. Now typically there’s different ways to set it up, but typically most people would like the maximum payments back to themselves. So we call that an Optimizing Charitable Remainder Trust or Optimizing CRT, or CRT, since we like acronyms. And the best that you can do for yourself in something like this is 90% of the assets would come back to you. And when you pass away, 10% goes to charity. But that’s depending upon normal life expectancy. So you think a normal life expectancy, if the donor lives past normal life expectancy, well, they’re going to get more than 90% and charity is going to get less than 90%. Or if a donor has impaired life expectancy or passes away early, they’re going to get less than 90% and the charity will get more than that 10%. So just be aware of that. In some cases, that’s no problem/ Because people were thinking, well, you know, this property, I was going to give that to charity anyway, so it doesn’t matter. I mean, hopefully I live a long life, but if I pass early, charity gets it and I’m okay with that. Some people are not okay with that. In fact, maybe even most people are not okay with that because they want their kids and their beneficiaries to benefit. Let’s say you set this asset trust up, put the asset in, you get in a car accident three weeks later, basically you got almost nothing out of it and charity got the whole benefit. So what some people do, and if that’s the concern, which it is for many, is they buy a life insurance policy. Like let’s say they put in $1,000,000 property, they buy $1,000,000 life insurance policy. So if they do pass away prematurely, yeah, this asset goes to the kids. But the kids get $1,000,000 from another source so they end up in the same spot. You don’t necessarily have to get a permanent policy. You can do a term policy. You don’t need a permanent policy because remember, you’re getting this money back over your lifetime, right? So after a certain amount of time you’ve already got your money or most of your money back anyway, so just be aware of that. One more thing I want to tell you about this is this can be set up on a joint life. So it’s not just yourself. It can be you and your spouse. And where that’s the benefit is now it’s based upon joint life expectancy. If one of you passes, the other survivor still gets the benefits until they pass. So this can be a pretty long term payment stream. And if you have a piece of property that you want to sell, a stock that you want to sell, highly appreciated, this is a great way to do that. Particularly if you think you’ve got at least average or better than average life expectancy, then this could be a great thing for you. If you have impaired life expectancy, this may not be the best strategy for you because charity will potentially end up getting more. There are so many ways to structure this. I can’t go into all of them right now. But just be aware of this. This is when you have a highly appreciated asset that you want to sell and you don’t want to pay tax, then this would be a strategy worth looking at.
All right, I’ve got a bonus strategy for you. It’s also a split interest gift. This is called a charitable gift annuity. If you listen to us or read articles from fee-only fiduciary financial planning firms, individuals, the word annuity is usually a bad word only because a lot of the commercial annuities out there are high commission products where the person selling it may benefit more than maybe, perhaps they should, maybe you get less benefit than you should. In this case. The term annuity is not necessarily a bad term. Annuity just means you get a payment stream over time, right? Like a normal pension payment. Let’s say you worked at UCSD and you get a pension payment. That’s considered an annuity. That’s what annuity means. Well, this kind of annuity you give directly to charity. And what charity does is they pay you monthly payments for life. Monthly payment can be on one or two lives, and you get a tax deduction up front, plus money over the course of your life.
And the way that this works, like, let’s just say, I don’t know, you give $5000 to a charity that has these, then they’re going to say, well, the way we set them up is maybe $1000 or $2000 of that goes to us. And the rest, $3000 or $4000 that comes back to you in terms of an annuity over your lifetime. So whatever the charity is planning on getting up front is your tax deduction, but you’re getting a lifetime payment stream. So check your organizations. I happen to know Smithsonian does this because my parents did it. So anyway, there’s a lot of organizations that do this, and this can be kind of a good way to go. All right, I want to talk a little bit about when to give. Because it seems like a kind of a simple question, but there are really two main choices. You can give while you’re living, or you can give after you pass away through your will or trust, your estate documents. Both are good and one is better. Which is better? It’s better to give while you’re living, right? Not only does it feel good to give while you’re living, but you’re getting an income tax deduction as you go. Think about it. In your will, you have a certain amount of assets go to the charities of your choice. That’s great. However, it doesn’t do anything for your current income taxes. So you’ve taken what could have been a strategy to reduce taxes while you’re living and waited until you passed away. So you’d rather give while you’re living, then when you pass. Which is an interesting comment I’m making because a lot of you are thinking, well, yeah, but I don’t know how long I’m going to live. I don’t know how much money I need. I don’t want to do that. And I understand that. To me, this is where financial planning comes into play to figure out how much do I have in terms of assets, right? What’s my income stream? What’s my need? How does this kind of pencil out, given growth and inflation projections in terms of additional spending that I might want to do in my first retirement years? How does this all look? I think you kind of have to know that until you come up with a strategy to give while you’re living. But let’s just say you go through that exercise and you realize you got a lot extra. Even if you have to go to a long-term care facility, or even if both you and your spouse have to go to a long-term care facility. If you’ve got extra, you want to make sure you’re okay first. But if you got extra, then that’s when you want to think of a plan giving strategy to give a little bit each year so that you can take advantage of this, right? So that you can not only feel good about giving while you’re living, but you get a tax deduction to boot. All right, so let’s maybe summarize what we talked about. So we talked about different gifting strategies, timing. So what you got to consider is what’s going to make the most sense for you? Right? And when do you want to give? Do you want to give more while you’re working, right? And less while you’re retiring? Some people like to tithe, which is- could be any percentage, but a common percentage is 10% of your income. If you’re in that category, you probably will give more while you’re working and less while you’re retired because your income could be less, right? So figure out when you want to give and consider the best strategies for you. I can tell you just from experience that a lot of you are giving very generous but getting zero benefit because the standard deduction is here, your itemized deductions are here. Maybe you gave $2000 or $5000 or even $10,000 to charity, right? But you didn’t get over that standard deduction. So you didn’t get any benefit whatsoever. So in that particular case, you might want to consider bunching your deductions or a donor-advised fund. You might want to think about QCD, right? Because QCD, qualified charitable distribution. If you’re going to use the standard deduction anywhere- way and not get a benefit for that donation, why not just pay it right out of your IRA? So you basically reduce your income that way. So consider your amounts and timing and what strategies will work best for you.
It’s a lot of great strategies out there. Just a matter of knowing what works for you. Probably there may be different strategies, different years. Like for example, let’s say your income is pretty high in a given year versus other years. Well, that might be the year to do a donor-advised fund. Or let’s say you have appreciated stock that you would like to sell. Maybe a charitable remainder trust or charitable annuity trust, or charitable lead trust. Some of these things could come into play. Write down your plan. We talk about this all the time. You can have a plan in your head, but it typically doesn’t get implemented unless you not only write it down, but you check it regularly. I’m not saying every week or even every month, maybe once a year, maybe in December. You pull out your plan and you figure out what’s going to make the most sense for you and then make sure that you implement. Right? Because the thing about all this is it’s easy to watch a presentation like this say, yeah, this all makes sense, I’m going to do something. And then you never do anything because life gets in the way. So this is where writing down your plan, coming up with a strategy, considering what strategies are going to work best for you in any given year, and thinking about maybe every December, what is going to be the best strategies for me in the current year based upon my circumstances, right? In December- November, December, it’s a good time to do it because at that point you kind of know what your income is. Now, some of you have very steady income. You got a pension or salary, steady throughout the year, much easier to do planning, charitable planning throughout the year. Some of you have variable income, right? Let’s say you work in sales and you’re commission based, and you never know exactly when your salary is going to be higher because of commission. So maybe you want to wait in November or December to try to figure out what charitable strategy makes the most sense for you, right? Or maybe you sold a property towards year-end, or maybe you’re a business owner that last couple of years weren’t so good because of COVID and now things are booming. But you didn’t necessarily know that at the beginning of the year, but you do know that you have a better sense of that. November December, it’s probably when you really kind of you want to come up with your overall plan. But I think November, December is kind of when you fine tune it, particularly if your income is irregular, right. Because that way you can come up with the best plan that makes sense for you. So with that, I think that’s what I wanted to tell you today in this presentation. Andi, do we have any questions?
Andi: Mike says, “Can I contribute IRA money to a donor-advised fund?
Al: Great question. IRA money to a donor-advised fund. So let’s go back to what we’re talking about. We’re talking about a qualified charitable contribution or distribution. So remember, this is when you’re giving money directly from your IRA to charity. Remember, you got to be 70 and a half years old to do this, and it can count towards your required minimum distribution and it can be up to $100,000 per person. So the answer that you’re asking is no, unfortunately. In other words, you have to give directly to a charity. You are not allowed to do this strategy into a donor-advised fund, which would be cool if you could. Donor-advised fund is where you set up a pool of money that you can then designate to a charity of your choice in the future. It’s just not allowed for this particular strategy. So you have to pick a charity.
Andi: The next one is Anna. She says, “What kind of supporting documents do I need if the IRS audits my return?”
Al: Oh, that’s a great question. Hopefully, the IRS never audits you, but it does happen from time to time. So here’s what the IRS wants you to do. They want you to have proof that you made the donations. So what’s proof? So it would be like your bank statement showing the contribution, canceled check.
It could be your credit card statement. If you’re giving away honest to goodness cash, then have a receipt from the organization. Don’t do that. It’s much better to have a third-party verification on what you gave, such as your bank, such as your credit card statement. So that’s kind of number one.
Number two, is if it’s a gift of over $250,000- $250, sorry, not thousand- $250 or more, then the charity is supposed to send you a receipt saying that you gave such and such amount for our organization on such and such a date. You want to keep that, because if your gift is more than $250 and you don’t have that and you get audited, it will be disallowed. Now, actually, most charities send these letters out to everybody. And I think, if I’m not mistaken, I think if it’s over $75, a charity is required to send it to you. I think that’s the current rule. But for you, the important thing to know is if your donation is more than $250 in a year, not one time, in a year. If you give several donations of $20 and it gets over $250, you’ve got to have a letter stating that you gave that amount. So those are the two things that you need as far as documentation to be able to prove the donation if the IRS audits you.
Andi: The next question is from Joanne. She says, “I will take my first RMD in 2023. If I want to do qualified charitable distributions, do I just call Vanguard and tell them to donate the RMD to all of my favorite nonprofits?”
Al: Great. Great question. So we’ll go back to where we were. Again, this qualified charitable distribution. How do we do it? And it depends upon who you’re with. If you’re with Vanguard or Fidelity or Schwab, they’re all pretty similar. I know for a fact that Fidelity, you can do all of this online. So you just log into your account, you go ahead and set up a distribution from your IRA, and you check the box qualified charitable distribution, and you say where the money is to go to. Now, remember, and I probably should have said this before, when it comes to charity, it has to be a qualified charity, which is in accountants terms, it’s a 501(c)3, 501(c)3, which is numbers and letters that don’t mean much. It’s a code section. And basically what that says, it has to be a charity that’s organized in the United States under that code section, which virtually all charities are. I shouldn’t say all. There are nonprofits that are not. For example, political organizations do not qualify, and there’s other organizations that never got their status. You can’t give money to an individual. It has to be an organization that’s a 501(c)3. But yeah, you can do it right online at Vanguard. If that’s too confusing, just call up their 800 number and have them walk you through it. That will be true anywhere, whether it’s Fidelity or Schwab. You can either go online or call to get some assistance on that. Remember, you have to be 70 and a half to do this. And also remember, it can count towards your required minimum distribution if you are 72 and older.
Andi: All right. And the next question comes from Greg. He says, “How much am I allowed to deduct for non-cash donations to Goodwill and Salvation Army?”
Al: Non-cash donations. Good question. So a non-cash donation is like, you go into your closet, you’ve got old clothes or old shoes or, I don’t know, an old toaster, whatever it might be.
So you gather that up, you take it to Goodwill, right? And you do want to ask for a receipt, because when you drive up to those places, they will ask you, do you want a receipt or no? The answer is yes, you want a receipt, because that helps prove that you actually gave that donation. They will not typically itemize what you’re giving them. That’s up to you. Right? So in some cases, people take that little receipt, and they just write out what they gave away. Okay? And if they- or maybe they just kept their own spreadsheet or whatever. So I would say this. I have seen people get to the I gave away four shirts, four pairs of socks, two shorts. I mean, that’s great if you want to go to that level of detail. In my experience, a bag of clothes, a bag of shoes, that can suffice. But remember, when you’re thinking about what’s the value of the donation, it’s not what you paid for it. It’s what you could sell it right now at a thrift shop, which is pretty low, probably 10% of what you paid, maybe 20%. So don’t go crazy. If you bought a $1000 suit and you give it away, you’re not getting a $1000 deduction. Maybe you’re getting $100 deduction, $150 deduction, I’m not sure. But just- so itemize things out. What I have basically seen and this tends to work on audit is just like I say, bag of clothes, bag of shoes, bag of toys, whatever, and then come up with a valuation. Try to think about what you paid for this and then take 10% of that as kind of an estimate. If you really want to get good at this, there are websites out there that tell you what the value of certain items are and you can itemize each one. I’m just saying, for most of us, myself included, I don’t want to do that. I don’t think you do either. So just kind of write this down. Now, if your total donations to Goodwill, Salvation Army, or whoever are less than $500, you don’t really have to worry too much about it. But if it’s more than $500, now you got to start itemizing on your tax return. So that means that now for every organization that you gave non-cash goods to, you got to put down the date of the donation, the name of who you donated to, their address, their ID number, what you gave, what the cost basis was. In other words, what you paid for it. What it’s worth right now, that has to go on your tax return. So just remember, if you’re under $500, you don’t have to do much other than just have a few records. If you have more than $500, you have to itemize. And furthermore, if you give more than $5000 away of non-cash items, of related type items, you may need an appraisal. So just be aware of that. How much you can give away, it just depends. But I would say this make sure whatever you’re giving away sort of passes the smell test. Like, let’s say you make $50,000 a year, and every year you’re giving $10,000 of non-cash donations, which probably meant you spend $100,000 to get that. It doesn’t make any sense, right? So just be careful. Here’s what I’ve seen in practice is people will give $200, $500, $800, $1000, $1200, year in, year out, and then they might have one year where it’s a real big amount. And the reason is because maybe their parents passed away or their uncle passed away, and they inherited a bunch of stuff that they gave away. That would be a good example of why you might have a big amount. You may be questioned. However, these days, when it comes to audits, most audits are not going to the office. Most audits are by letters, which is way less intimidating. So you get a letter in the mail saying, we’re concerned about your charitable deductions. Please send us what documentation you have. Typically, then, you just write a letter, you copy the documentation, and you send it out. Make sure you have the documentation in case it comes up. If, for example, you’re kind of giving $500 every year, and then all of a sudden it’s $4000, yeah, you might get a letter that’s a lot higher amount. You may not you know, IRS is stretched on resources, so they’re not doing a ton of audits. But typically these days, when you do get audited, it’s a letter.
Andi: All right, the next question is from Randy. He says, “Can I deduct the amount I spent at a silent auction at a local charity as a charitable deduction?”
Al: Oh, that’s a good question. So silent auctions, I’m sure a lot of you guys have been to them. So you go to some kind of gala- gala, some kind of charitable event, where it might be a dinner, it might be, whatever, some kind of get together, it could be happy hour type of thing. Oftentimes there’s some kind of speaker for the organization or a couple of speakers, and many times they have an auction. Sometimes it’s silent, sometimes it’s not silent, right? People are actually bidding on stuff. But a silent auction is where maybe before the dinner presentation, whatever they’re putting on, there might be a whole bunch of tables with stuff on it, like trip to Cabo San Lucas or whatever, a new toaster, whatever it could be. And then you kind of put your bid on that. Sometimes it’s completely silent, goes in an envelope, and no one knows. In other cases, there’s a piece of paper that shows the latest bid. And if you want a bid more than that, you just put it on the paper. So you can kind of see if you’re winning, per se. But then, let’s say at the point where they announce the winners, if you’re the winner and you get this trip or whatever, then there probably is a charitable deduction, but not the whole thing, right? So what the IRS says is that you take whatever you gave in total and whatever the value of what you gave. That difference is your charitable deduction. Sometimes it’s hard to figure out, right? Sometimes the organizations will tell you what the value is, sometimes they don’t. If they do, great. Just use that amount. In some cases, the value might be more than you paid for it. So you do not have a charitable deduction in that particular case, right?
So just be aware of that. If you don’t get a value, just do your best. Try to come up with your best guess as to what you think it’s worth, subtract that from your total donation, and that would be the amount of your charitable deduction.
Andi: Alan, I think we have time for just one more question. But in the meantime, armed with the right information, you can control how much tax you pay now and in retirement. Sign up for a free tax reduction analysis with one of the experienced professionals at Pure Financial Advisors. I’ve put the link into the chat. You can go ahead and schedule it at a date and time convenient for you. You will learn how to implement the charitable giving strategies that Alan has been talking about today. You’ll learn how to legally pay fewer taxes than ever before, the benefits of the Roth IRA, myths and mistakes to avoid. You’ll also learn tax loss harvesting techniques, tips for reducing taxes on your investments, and how to generate tax efficient income in retirement. This no cost, no obligation, one on one tax reduction analysis is specifically tailored to you and your financial situation. Pure Financial Advisors is a fee only financial planning firm. They don’t sell any investment products or earn any commissions. And Pure Financial is also a fiduciary, which means that we are required by law to act in the best interest of our clients. Pure Financial Advisors has 4 offices in Southern California and new offices in Seattle, Denver and Chicago. But you can meet with any of our advisors online from anywhere via zoom. Just click the link, choose the day and time that works the best for you, but get your appointment booked ASAP while there is still time on the calendar. That link, once again, is in the chat. All right, so now let’s get to our final question, which was from Phyllis. She said, “Would real estate be a good asset to put in a charitable remainder trust?”
Al: Phyllis, the answer is yes. So let’s go back to there, charitable remainder trust. This is that split interest trust where you get a benefit and charity gets a benefit. Both. So remember, you set up the charitable trust first, you put the asset in, appreciated real estate, then the trust sells it, reinvest however you want to, maybe a globally diversified, low cost portfolio, which is what we might recommend, but it could be anything that you want. You get payment stream for life, right? Charity gets whatever the value is when you pass away. So that’s the benefit. Yes, real estate is a common asset used in this particular circumstance. And if you think about it, like, let’s say you bought a rental property in the 1980s or 1990s for kind of a low amount, because property has appreciated pretty well a couple of times since then, and so now it’s worth a lot. And now you paid for this and it’s worth this, but you depreciate it. So your cost basis is now down to almost nothing. You don’t really want to sell it, because you have to pay a lot of tax. So you want to go ahead and do this or you want to consider this strategy. You put that appreciated real estate in and then the trust sells it and pays no tax because it’s a tax-exempt trust. So it’s a great strategy. Just to be 100% clear, you would not put a piece of property in here that is not highly appreciated, because what’s the point? Just sell it. You’re not going to pay much gain and you keep the proceeds, right? So you’d use this if you had an asset that’s highly appreciated and you want to sell. And I get that question all the time. What if I just put the property and leave it in there? Well, you could, but I’m not sure what benefit you get because your income is going to simply be whatever the rental property income is, which you would have had anyway, right? And essentially, you’re the trustee here. You’re still managing the property through your property manager, right? Probably. Or maybe yourself. So I don’t see any benefit if you’re not going to sell it. This is what you do when you have a piece of property, highly appreciated property or highly appreciated stock that you want to sell and you don’t necessarily want to pay the taxes. So if you think about it, if you’ve got $1,000,000 property and let’s say your federal and state taxes would have been $35,000, right? So you end up with $650,000 to work with as far as investments to create a cash flow income from. With this strategy, you get that whole $1,000,000, you keep it in the trust and now you got $1,000,000 to invest, not $650,000 to invest and have money coming back to you over the course of your life. And remember how this works is that not only is the income and growth, but also principal. And 90% of the benefit of what’s in this trust comes back to you. So typically your payment stream is quite a bit higher than what it’s earning, right? Because that’s the point. The point is you want to try to deplete what’s in here and then charity gets less over time. So for example, depending upon your ages, the younger you are, the lower the percentage because you’ve got a lot of years to get that 90% paid out. The older you are, the higher percentage payout because there’s not a lot of years to get that payout. So just realize that it works best if you’re maybe 60s- 50s, 60s or older. You can do it in your 30s and 40s. It’s just not as good a payout. Let’s just say you do this in your 70s, for example, then the assets inside may earn interest and growth, let’s call it 6%, 7%, whatever. But your payout may be 12% or 13% or 14% because you’re wanting to deplete the principal from here. So the charity gets only 10%.
And maybe this brings up one more quick point, is because you are depleting the principle out of here and let’s just say very simple example 10%- $1,000,000- 10%. So you’re getting $100,000 in year one. Year two, it’s probably going to be something less because probably the assets inside of it didn’t earn 10%. Maybe they earned 6%, right? So maybe now you’ve got something like $960,000 in here. Now your second year you’re getting $96,000 payment and so on. It’s a reducing payment. You’re getting more payments up front, right? Which is cool because most of us want to have the most fun in our retirement when we first retire with traveling, whatever. But then it declines over time, which is a reason why you wouldn’t want to put all of your assets in here because you basically are guaranteeing yourself a lower income every year for life. So this is a good strategy to go along with other things that you may want in your overall portfolio. It’s a great strategy, doesn’t work for everybody. But if you have highly appreciated real estate or stock and want to sell it and don’t want to pay the tax because you want all the principal working for you, I can’t think of anything better.
Andi: All right, Alan, I think that is all the time that we have for questions today. Once again, if you did not get a question answered, if you still have your question waiting to be answered, this is the time to schedule your tax reduction analysis. Click that link in the chat to go ahead and schedule it at a date and time convenient for you and get all of your questions answered. Start implementing these strategies, but start soon, before the end of the year. Alan, thank you so much for taking the time to do this today. We really appreciate it.
Al: Andi, it was my pleasure. This is one of my favorite topics. Happy to do it any time.
Andi: Alright, thank you all so much for joining us. Have a great day. Bye.
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