Are You a Donator? Great! Here Are Top Tips
Wow! Can you believe we are at the end of 2021 already? 2020 definitely marked a year of significant changes and is shifting many of us into the next stage of our lives. So many organizations and businesses have been negatively impacted since 2020. One sector, in particular, can really use our help—since they are actively engaged with helping others: nonprofits and foundations. Here are some ways you can help and support them and make your donations go farther than ever.
A lot of folks make charitable donations each year, but they aren’t aware of an easy-breezy method for doing so. This is to create a Donor-Advised Fund (DAF). These types of accounts can provide significant tax deductions. It’s almost like having your own personal charitable organization—without having to create an organization and file separate tax returns for it. With a Donor-Advised Fund, you can deposit cash or place investable assets, such as stocks, mutual funds, or ETFs into the account, without having to sell them. If the assets have appreciated and have been held at least one year, the contributor can benefit the most by depositing those assets into the Donor-Advised Fund.
For example, say Mr. Smith owns a stock that was originally purchased two years ago for $10,000, and it’s now worth $50,000. Yay! If he chooses to deposit the stock into his DAF, he would benefit by getting a federal tax-deductible credit of $50,000. Wow! If, however, he chose to sell the stock and just donate the cash, he would be subject to the 15% capital gains tax rate. This means he would owe $6000 in taxes on the $40,000 appreciation, and his donation would be reduced to $44,0000.
In addition, the donor can receive a tax-deduction in the year that the contribution is made into the Donor-Advised Fund, but there is no requirement for when the nonprofits must receive the funds or assets. Those donations can be made at any time and in any year, giving you flexibility and control over the donation.
Contributing to a DAF can be extremely beneficial if you have experienced significant gains in income. QCDs are Great for Retirees
Qualified Charitable Donations, also known as QCDs, are a great option if have income from retirement accounts. First off, as you might or might not know, when a person takes their Required Minimum Distribution (RMD) from a retirement account, that amount is taxable as income. This is an annual IRS requirement, whether one needs or wants the funds or not. For decades, the age at which you had to start taking funds from retirement accounts was age 70½—but with the SECURE Act, the RMD rule changed that age to 72. However, a person can take their RMD and donate it to a nonprofit—which could be a church, school, foundation, etc. And guess what? When that happens, the amount donated made is not taxable. It cannot be counted as a tax-deductible donation, but it meets the requirements of RMD rule without counting as taxable income.
For example, say Ms. Jones’s RMD from her IRA this year is $20,000. She decides to donate $10,000 to a nonprofit—that amount is not taxable to her, nor is it tax-deductible as a donation. She still must withdraw the remaining $10,000, and it is taxable, but she meets the RMD rule that she withdraw $20,000. This means she is able to cut the tax ramification of the RMD in half. And if she had decided to donate all of her RMD, none of the amount would be taxable as income.
Additionally, although the RMD age has changed to age 72, you can still make QCDs from a retirement account starting at age 70½, even though you are not required to take an RMD. And yes, those QCDs are not taxable as income!
QCDs offer a non-taxable avenue for managing retirement distributions. Final Top Tip: Estate Planning
This one doesn’t cost you anything. You can name nonprofits, schools and universities, churches, and other organizations as beneficiaries on your retirement account(s), your life insurance policies, your will, and/or your trust.
Have you been receiving periodic notifications from groups you support asking if you have named them in your estate planning documents? (I have!) When you name a group as a beneficiary, it will receive those specific assets when you pass away. Doing this doesn’t cost you anything now. But trust me they will be so excited and happy—and they will feel financially secure knowing that you are expanding your support for them.
Cheers, and happy giving!
Securities and advisory services offered through Urban Wealth Management a SEC-Registered Investment Advisor. Urban Wealth Management does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.