Charitable giving is a great way to give back to the community and can also provide great tax benefits for yourself. Depending on the type of charitable organization and the size of the donation, there are various ways to maximize the tax benefits of your charitable contributions. In this episode, Tommy, Michael and John will be sharing how you can maximize the tax benefits of your charitable giving while helping a great cause.
Listen in as they explain what a Donor-Advised Fund (DAF) is and the control you have by contributing to one of these. You will learn the minimum that needs to be contributed to a DAF per year, how to gift money to your children in the most cost and tax-effective way and why charitable giving is one of the most underutilized tools in financial planning.
Listen to the full episode here:
What you will learn:
- How charitable giving can be tax efficient. (4:30)
- What “bunching” is and how you can use this to your advantage. (9:15)
- What a Donor-Advised Fund (DAF) is. (10:50)
- The minimum that must be contributed to your DAF. (18:00)
- The advantage of getting rid of single-stock risk. (24:50)
- How you can gift money to your children. (26:50)
- Why you shouldn’t wait until you die to make charitable contributions. (29:20)
- The importance of considering charitable giving as a part of your financial plan. (36:00)
Ideas worth sharing:
“It’s not necessarily just to save you money on taxes—it’s to give you as much control as possible so you get to choose where your dollars go in the future.” - Mason & Associates, LLC “Charitable desire is what is driving this, and the tax benefits are just the [icing on the cake].” - Mason & Associates, LLC “Don’t wait until you die to make a charitable donation.” - Mason & Associates, LLC
Resources from this episode:
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Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner, John Mason, certified financial planner, Tommy Blackburn, also certified financial planner, and CPA.
Mason & Associates have over three decades of experience helping federal employees with their financial plans.
This episode recording November 15th, episode 28: Tax Planning and Charitable Giving.
Guys, it's November 15th. It's been kind of special over the last three or four days. Grandson Carter's birthday, on Friday the 11th, Veteran's Day. I served right at six years. John, your birthday today. So, pretty special week here at Mason & Associates.
John Mason: It's been an awesome couple days. Can't believe I'm 35-years-old today and have been here. I'm working at Mason & Associates since 2010. So, that's going on 12, almost 13 years. So, awesome time. We've got Tommy's birthday coming up, and so November is busy, and you left off Penny's birthday.
Michael Mason: Goodness gracious. Forgive me.
John Mason: And for our listeners, Penny's my golden retriever. She's now seven. And she shares a birthday with Carter as well.
Tommy Blackburn: Wow. So, yeah, quite a bit going on here in November. Of course, we got Thanksgiving coming up, which is always fun to look forward to. And I think I'm the day after Thanksgiving November 25th. I think that is the day after Thanksgiving this year. So, quite a bit November.
And yeah, John, when you said to me this morning when we were chatting and greeting each other and you just said like, “Oh man, 35, just stop and thankful, man.” I was like, “That's right. That's where we are.”
Michael Mason: Yeah. I came into business in 1987. I was 25 years old, and I said to John earlier today, I said, “Can you believe when I was 35, I already had a 10-year-old and an 8-year-old at that time?” So, time flies, man.
John Mason: Well, speaking of the holidays, you guys will probably get a kick out of this. You haven't heard this story yet. So, Sarah, my wife, she has been asking Carter, our son, who's now three every single day for the last few days, “What are you thankful for? What are you thankful for?”
And they're building this turkey, and the feathers are everything that he's been thankful for. So, a lot has made the list. It was like, “I'm thankful for cows, pigs, sheep, dinosaurs, all of these things.” And we're like, “Are we ever going to make this list?”
So, it turns out we finally made the list. So, Carter is thankful for mom and dad on like day nine. We finally made the list. So, we're thankful that we made Carter's list at some point.
Michael Mason: That's a comfort zone. You're so comfortable with that mom and dad are always right there. You don't necessarily think about … I mean, people sometimes (I won't get too deep in this) make the same mistake with their spouses.
Just because they're right there and always right there, should be number one on our list.
But charitable giving is number one on many people's list. And Tommy's the resident CPA in the firm, and he wanted to do towards the end of the year this charitable giving. So, Tommy, let me kick it off, kick it over to you, where do we want to start with this?
Tommy Blackburn: So, this episode's probably not going to air until January of 2023. But hey, maybe that way, it gives us an entire year to get this process underway in 2023.
Of course, as we approach the end of 2022 and we're recording this, this is really top of mind a lot of those year-end items that we're trying to wrap up here with our clients and ourselves.
So, where we kind of really start with this, is we don't introduce charitable giving as just something to introduce to our clients. It's usually we determine through conversations with them that this is something they do routinely or it's very important to them. There's some type of desire to do it.
And so, from there, we want to help you accomplish your goals. And we look, and we say, “Well, is there a tax-efficient way we can help you do this?” And that could be either because it allows us just to save some tax dollars and that's just almost the American way of life.
But as we talked before this podcast, that also just means you now have more money to control what to do with, which maybe that's more charitable giving. Maybe this just pumps up your ability to give more and more to what's important to you.
So, that's where we look at it. It's never to … when we ask the questions to new clients of, “Hey, is charitable giving something that's important to you?” There's no judgment attached to it.
We're just trying to see what's important to you, and is there a way we can help you accomplish even more through some strategies?
Michael Mason: Yeah, so good financial planning and most of what we do in this podcast is trying to help you, one, be your own financial planner or two, at least know the questions to ask to make sure that whoever you’re using as a professional is good.
So, today, it's really hard when you pick up a tax return to know whether somebody's charitable or not, unless they’re big time charitable, because your standard deduction is so high you may not see that they gave $8,000, $9,000, $10,000 to church or charity.
And to Tommy, your point, when we ask these questions in the introductory appointments and whatnot, we're not asking it to be judgmental where you don't give anything. We're asking it because maybe that's the only place we can get the info because it's not readily available in other places.
John Mason: And I think we've found anecdotally as we meet with clients, is that sometimes they downplay their charitable giving and they're like, “Oh, well I don't really give a lot, and it's $5,000, $6,000, $7,000, $10,000 a year.” And maybe that's a lot to some people and not a lot to others.
And it's just fascinating that, especially in new relationships, Tommy, you really have to dig deep. And it's like, “Well, what do you mean by you give a little but not a lot? Can we put a number on it?” Because then I can quantify some tax saving strategies and way we can do this.
And the goal is not to get our clients guys to give away more money. We just want to help them if they are donating and they are giving away their money, we want to show them a path that does it more efficiently. So, not judgmental, and also not trying to get them to give away the house. It's just let's make what you're doing really efficient.
Tommy Blackburn: What a great point, John, because it is interesting, really hats off to our clients, I guess I would say, because oftentimes we do get that response of, I don't give much, but the number is somewhere between $5,000 and $10,000 a year.
And it's like, “Well, that's enough for us to talk about some other strategies, and that's definitely more than nothing or not much in our book.” So, that's always fun to look at.
And I think from there, we then kind of begin to layer in some of the financial planning concepts that we may have available. And maybe, the best place to start is thinking about this concept of bunching.
And if we're not ready to go there, you guys reel it back in. But if we are, Mike, if you could touch on what is this concept of bunching our charitable deductions?
Michael Mason: Well, based on what we've already said, using that $5,000 to $10,000 a year that we'll typically see, whether it's church donations or charity donations. $10,000, we typically see doesn't get you over the standard deductions. So, your $10,000 that you just gave didn't necessarily earn you any tax benefits for doing that.
What if there's enough money in various places that you can give for five years of $10,000? Or let me say it this way, if Uncle Sam would let you forward think I want 10 years of 10 grand, and I'll give you the deduction up front of a hundred thousand.
But you don't have to give it upfront to the church, you can spread it out over the next 10 years. So, if we bunch it now, all of a sudden, it may save us combined 30% in taxes in that one year.
John Mason: And the reason bunching Mike is so important is because under this new tax law that we have, is not new anymore. President Trump's tax law, it limited state and local tax deduction to $10,000 a year married filing jointly.
So, you've got that 10,000 cap. Most of our clients, we don't see any medical expenses. Other miscellaneous deductions have been eliminated entirely or phased out. Then mortgage interest has come down. So, many of our clients refiled at 2%, 3% and 4%. So, mortgage interest is a non-factor.
So, it's not uncommon for us to see folks that are giving $10,000 a year to charity and not itemizing. So, now all of a sudden that $10,000 just got you to the point where you're at the standard deduction.
I think a good story here too, because you said something that was perfect, was you said that $10,000 gift didn't give you any tax benefit. And I thought you said that so elegantly because I have a client who I mentioned we're doing tax planning, Tommy was here, he really got us kicked off on this even more.
And I said, “You're giving $10,000 to charity, and it's doing nothing for you.”
Tommy Blackburn: Nothing from a tax standpoint.
John Mason: And thank goodness, we were on a Zoom meeting because I don't think that really came across how I intended it to come across. So, it's not doing anything for you from a tax standpoint. So, I've become very cognizant, words matter, and I thought you did a good job.
Michael Mason: Well good. And I used a big number, a hundred thousand, but let's say it was you just were able to give five years of $10,000 in one year. And Tommy, how do we give five years in one year but not really give it to the church and still get the tax deduction?
Tommy Blackburn: So, now, we're going to layer in that concept of a donor-advised fund, I believe is where we're going with that one. And so, a donor-advised fund, you can get these through various charitable organizations.
One we use frequently is Vanguard Charitable. Essentially, I think, and you guys help me here, a good way to explain a donor-advised fund is, I think of it, it's almost like your own foundation.
You put this money over there similar to how it would happen in a foundation and it's a completed gift. There's no takebacks; the money's not coming back to you. So, that's where, to Mike, your example of we could give five years if we had the cash or some other asset upfront.
We could say, “We know we're going to do this over five years; let's do it now so we can get well over the standard deduction and really get that tax benefit in this one year.”
It goes in there, but it doesn't go directly to a charity from there. It just sits it can be invested. There's a lot that can happen inside of that donor-advised fund. But then you as the advisor to that fund, that donor-advised fund, you get to say every year “Send $5,000, $10,000 to that charity that I care about, that church that I care about, whatever it is that's important to you.”
So, you get to continue that level giving, but you got five years of a deduction up front. It was really just a paper move. The only other caveat there is, as we said earlier, it is a completed gift. Once it goes in, it's not coming back to you.
Michael Mason: But we’ll make the assumption that the first $10,000 didn't get you over the hump, but that other $40,000 did. So, you could spend five years giving 10,000 a year and get no tax benefit or this year, give the extra $40,000, make it 50 to the donor-advised fund.
Let's say that saves you $12,000 in taxes, 40 times 30%. Well, John, back to your client who kind of looked at you sideways when you said “You’d get no benefit,” her charity's very important to her.
Maybe she's thinking, “I don't care whether I get a benefit or not, I don't care whether I get that 12 grand.” Well, again, we would reposition to her that says, “Okay, do it my way still and give the charity that other 12 grand.”
So, somebody's going to win. Do you want Uncle Sam keeping the 12 or do you want the charity keeping the 12 or you keeping that extra 12?
John Mason: Well, we just want to be as efficient as we can, I think is what it comes down to. And although we didn't do the donor-advised fund that first year, we talked about it again the second year when I got a little bit better in my presentation skills, and we were able to do a very nice donor-advised fund.
But there's a lot of emotions that go into charitable giving, and there's a lot of barriers that you have to overcome. And it could be something as simple as I really like putting money in the offering plate every Sunday, or I really like doing it this way.
And then having to pivot that way of thinking, we have to be sensitive to that as advisors because we just have to. Like there are some things that even though it's plan A, we have to be okay that not every client always wants to go with plan A.
And Tommy, you mentioned so much of the flexibility that is in these donor-advised funds, whether it's Vanguard, Fidelity, and other custodians. One of the things I like to say is “You've given your money away, but you haven't gifted it to anybody yet.”
Tommy Blackburn: That's a good way of putting it.
John Mason: So, you've gifted it away, but you haven't gifted it to anybody yet. I think as we're recording this, there's some churches that are going through some stuff and I know clients have stopped giving to certain churches recently, due to whatever's going on politically in that environment.
Well, in a donor-advised fund, you can just go in and change where your automatic tithe is going because you haven't given 40 or 50K to church ABC or we can pivot. So, I love saying it that way.
Tommy Blackburn: That’s a really good way of putting it and that's what's so awesome about it, is you still have so much flexibility, you still have some control here, can't come back to you, you've committed to this money will be given to charity, but you haven't committed to how much and when specifically, there's a pot of money there.
It's kind of neat also with these donor-advised funds is typically, they can be invested in a portfolio. So, we can either have it sit in cash in that donor-advised fund and maybe that makes sense if it's going to go right back out in a couple years or we could even have it invested in a portfolio so it can grow.
And some people who are very charitably inclined, they really get excited about this concept where it's almost like it becomes a legacy giving account and they want to get that account, as big as possible because they want to see interest coming off of it that can then support more charitable giving down the road.
So, this could even become an investment vehicle specifically to further that charitable cause. It just brings me back, Mike, to your point of, it's not necessarily just to save you as much taxes, but it's to give you as much control as possible so that you get to choose where these dollars go in the future.
And it's just so exciting and just gratifying. I think for us when we help clients do this, it's just to empower them and just see how excited they get to take more control and do even more than they thought they could with their charitable intentions.
Michael Mason: When I think about bunching, I always default to the biggest bang for the buck, the donor-advised fund. But bunching could be as simple as, again, it's November and let's say I've given my $10,000 this year to my church already, but I've got cash flow solid.
And I think, okay, well, how about I give 2023’s $10,000 in December of this year. Instead of yet going another year and not giving. So, you don't always have to have 50,000 to put in a donor-advised fund, but if you have that extra $10,000 that you can give this year, well, that's going to be fully above that itemized deduction.
John Mason: And this probably is a little off topic, and the scenario not that likely, but it's the end of the year; maybe you can squeeze in one more medical procedure. That now, you can bunch your medical deductions all into a single year. Layer that in with your donor-advised fund and you have even more.
So, the concept of bunching things together, whether it's medical, whether it's all of these things, is really helpful.
Tommy Blackburn: Whether it’s how you meet with your clients, how we do our strategic planning meetings, we bunch those in the spring. So, yeah, this bunching concept, now I think about it presents itself in many aspects of life.
John Mason: And I know some concerns, guys, have been on these donor-advised funds like, “I don't know guys, like Mason & Associates, this is really good advice. I like the tax impact. I like the idea of a donor-advised fund, but what if something changes in my life and I don't want to give so fast or what's the speed limit on these donor-advised funds. And is there a minimum amount that you have to send out every year?”
Tommy Blackburn: John, and correct me if either of you know for sure, but I don't believe there is any minimum that has to go.
I believe they encourage you to try to do at least like $500 a year. But I've never seen them … because I've seen some donor-advised funds don't do anything in a given year and I think that's absolutely fine. I don't think there were any repercussions to it.
So, I think you can take your time; you don't have to do anything in any year. And like Vanguard I think, what is it, a $250 minimum, I mean, just administratively, if they're going to send a check out, it needs to be for at least $250.
John Mason: You read my mind. So, maybe quick off the cuff, maybe quick lightning round on pros and cons of donor-advised funds, if we can think of any that we haven't said. And Tommy, you just took one and I'll hit it again.
Vanguard’s charitable minimum $250 per, I think they call it a grant. And that could change somebody's pattern of giving. If they're giving $50 a week to charity and now, all of a sudden, the minimum grant is 250, they need to change their cadence to gifting every five weeks instead of gifting weekly.
So, that's a potential negative that is not really that big a negative; it just needs to be talked about.
Michael Mason: Yeah, I mean just manage it. So, a positive on the donor-advised funds, I find myself, searching for receipts and when did I give this, when did I give that. And a donor-advised fund, it's done. One time, boom, it's in there, you write it off. And then you systematically send it out so you not having to keep receipts.
Tommy Blackburn: Yeah, you read my mind. I think from a tracking standpoint, it seems like it makes life easier, and you can name these funds what you want to make it vary. You can either keep it anonymous.
Or you could say, “This is the Mason & Associates giving account,” so that every charity that gets a check from our donor-advised fund knows it came from Mason & Associates. I'm just trying to use a name that doesn't put anybody's information out there.
But so, that to me, would be another positive here. You can have it so it's clearly identifiable. Or if you're a humble person that doesn't want it tracked back to you, you could give it some type of name that nobody knows where it's coming from.
Michael Mason: Yeah. And as we think about this now, the pros, I think, get much bigger as we dive deeper into this.
So, as you put a donor-advised fund on steroids, it's not just about the cash in the bank that you may donate to the donor-advised fund. Let's talk about donor-advised fund on steroids where we're donating something other than cash.
Tommy Blackburn: And this is where it starts to get real fun, I think for us from a planning standpoint. And so, what I think, Mike, is the path we want to go down here is what we call appreciated securities. These are capital type assets like stock and bonds, typically mutual funds, your market investments.
But it could be other assets; it could be land, it could be a house of some sort. So, just capital assets we'll stick with appreciated security, stock, bonds. John did you want to walk us through? I'm happy to keep rolling with it, but did you want to give us a little background on how that works?
John Mason: The cool thing when you donate, let's just say Ford stock and let's say you bought Ford stock at a dollar and now it's worth $10. We have the ability that we can either sell Ford stock and realize that capital gain, $9 capital gain per share, and then donate the after-tax portion to charity.
Or we actually have the ability, guys, and I know you know this, but we have the ability where we can transfer that share of Ford stock directly to a charitable entity, and as long as it's a long-term capital gain, we can transfer that security in kind. We do not have to realize the capital gain of $9, and we pick up the $10 per share tax deduction.
So, we get the fair market value tax deduction, and we get to avoid the $9 capital gain per share. It is by far one of the most efficient ways to rebalance your portfolio if you're overweight a certain position.
It's to get in line with your risk profile, to get rid of legacy positions that maybe you lost the cost basis and we don't know where to find it or how to reconstruct it. So, by far, one of the best ways we can offload some of those securities.
Tommy Blackburn: Wow, you just had a lot of great information there. We might have to spend a little bit of time touching on some more of those point going a little deeper on them, but that was awesome.
So, I think you start off, yeah, this is a double tax whammy really because we got to avoid the income, we never got taxed on it. So, that saved us 15%, at least long-term capital gains rate and whatever our state income tax rate is.
So, we avoided that altogether and we got the fair market value, whatever it was trading at that day as a deduction.
So, that's a double tax play. That's pretty awesome. You mentioned John, I think maybe we should touch on just like, “Hey, it's a great way to get rid of concentrated positions, potentially to reduce our risk. I don't know, you want to spend some time talking about that a little more?”
Michael Mason: Well, let me add this piece to it. Many folks say, well the reason the millionaires are the millionaires and the billionaires, is because they know all these loopholes. Well, you don't think Bill Gates is one of the most charitable because of a special loophole?
I mean he's doing the same thing — I'm not in his financial plan, but he's given away highly appreciated Microsoft stock that if he sold it and tried to position it, he's going to get hammered for those gains where he can give it to a charity, he can be the hero and get a tax deduction on it at the same time.
You can do the same thing. Maybe not at a billion dollars, but you can do the same thing.
Tommy Blackburn: Yeah, there are some limitations, whether we get into it or not, some income limitations on this. Sometimes we even position it to clients where if they have, they've been holding that Microsoft stock for example since it went public, and it's appreciated quite a bit now; you could at a minimum, just give that, and buy it back.
So, if you were going to take cash and give it to a charity, but instead we've convinced you, let's use this Microsoft stock so we avoid, let's call it, a hundred dollars a share in gains — let’s just make big numbers here.
A hundred thousand dollars of income we avoided, picked up a deduction. Well, we still could take that money you were going to send to the charity and go buy Microsoft stock again.
The reason we would do that is just to reset your cost basis. So, at least now, we don't have a huge tax bomb when that stock is sold. Now, that's not what we would advise typically because we want to diversify our holdings. But here's like, this is just some of the ways you can think about things and looking to make things more efficient.
John Mason: Well, we have clients — although we work a lot with federal employees, we have clients who are non-federal or spouses who are non-federal and they may have restricted stock, that vest that can generate a concentrated position. They may have legacy assets they inherited that could be a concentrated position.
Maybe they bought Facebook or some of these other tech companies when they IPO-ed. And when you have single stocks (this year, remember it's 2022 November 15th) we've seen some crazy stuff this year in single stock risk.
We've seen Target go down. We've seen Facebook lose 70 to 80% of its value. Caveat, I don't know exactly what those are, but I just know we've seen big drops. Tesla, Microsoft, Dominion Resources.
Tommy Blackburn: We got to talk about Dominion because that's a local one here.
John Mason: Yeah, I mean we've seen single stock risk really hammer clients, not really our clients because we don't have a lot of that, but hammer consumers this year. Well, what's the advantage of getting rid of single-stock risk?
Well, we can share stories where we help clients, guys, donate securities that were a hundred dollars a share after they vested, that if we had waited six months to donate those shares to charity, they'd be down to 50 bucks.
So, we picked up that fair market value deduction at a hundred dollars per share, got rid of that risky position, enabled us to get the fair market deduction. It's been a good in the rear-view mirror hindsight 2020. We did the right thing with a lot of these, and it was a great move for our clients.
Tommy Blackburn: I mean, they have to be charitable for these things to usually make sense. So, the charity, the charitable desires, what's driving it, the tax benefits are great. They're usually, not more than a hundred percent.
So, you are being charitable, you're not going to come out of this financially better. This is just ways you're better off than if you hadn't done it this way.
John Mason: So, tangent alert, Tommy. So, we're talking giving money to charity, and we're talking about donating securities to charity. So, I think we've said, if we haven't, I'll go ahead and say it. We can donate highly appreciated stock to donor-advised funds or directly to entities. So, you have both options.
Donor-advised fund gives you those additional flexibilities. What if (and maybe Mike, I can throw this to you) you wanted to donate money to your children? Maybe your children are buying a house, or you're wanting to gift assets to your children, and you have some highly appreciated stock. What would be a good idea if little John wanted to buy a house?
Michael Mason: I know where you're going. We did this specifically this year with a person high up in a corporation bonus, a whole lot of company stock wanted to give some money to his children to get them started.
They could (husband and wife) either given the money out of a bank account or they could transfer stock, that if mom and dad were to sell it it'd be in the highest capital gains rate.
But if the children sold it, maybe it was low or no capital gain rate. So, give them the stock, let them sell it and let them realize the capital gain at their rate.
Tommy Blackburn: And that one worked out, man … we have a lot of great hero stories, but this has got to be another one of them where that stock, the market has been unkind this year, particularly to that company. It's probably down 40% this year. But we were able to get in front of that and do it.
Not that we knew it was going to happen, but we just saw an opportunity. And in hindsight, that gift happened when the stock was still worth way more of … the children were taxed favorably.
And we also — even with that same couple you're talking about, Mike, I think we're talking about, we did that donor-advised fund. So, we also unloaded more stock for their charitable intentions into that. And it just worked out so well, allowed us to diversify a concentrated …
They had a lot of their money tied up in that company stock just because the company rewarded him that way. Just great tax efficient planning, helped him help their kids out to buy those first homes, helped them meet their charitable desires. It was just solid all the way around.
We've seen that with a number of stocks. Dominion, I know we mentioned. We've done a lot of gifting with Dominion this year, and it was at a high, I think at some point this year, and it's at least $20 a share less when I was looking-
Michael Mason: Maybe from 85 down to 58, is I think is about where it is.
John Mason: As we were preparing for this, and I think it's in line with everything we're talking about and I had made one note to myself to bring up, I think it's a good time. Don't wait until you die.
And as we think about our clients and their ability to donate to charities and help their children, having a really good financial plan allows our clients a peace of mind and empowers them to maybe donate a little bit more to charity or donate to the building fund rather than just their monthly tithe, or help their kids with their down payment.
So, donating in charity, helping your family, having that financial plan, guys, makes me feel really good knowing that we can empower clients to do those things today rather than saying, “Well, one day when I die my will says A, B, C.”
Michael Mason: Yeah, and then you lived in 95 and Barry, one of your children at their age 65, and you can never change their lives. But that's even bigger than charitable planning. That's financial planning to know that you can do this.
So, Tommy, I'm going to tee the next subject up for you. I'm 61-years-old. Let's say I'm giving $10,000 a year to church right now. And I've got the money to put $90,000, 9 years’ worth of $10,000 into a donor-advised fund.
Let's say I had the ability to put 15 years, but I make a decision to only put nine years, only $90,000 into a donor-advised fund. Why would I make that decision? What would my next trigger be?
Tommy Blackburn: Well, let's see; if you were 61 and we’re thinking nine years is where we want to stop at, that puts me at oh, about age 70, 70 and a half would be the magic age we’re looking at there. What I believe you’re looking for is what’s called qualified charitable distributions.
You are eligible to begin those at age 70 and a half, and those come directly from an IRA to a charity. So, it’s never made out to you, goes directly from your IRA.
So, pre-tax money to a charity, that's a tax-free distribution. You can only start this at age 70 and a half. It has to come from an IRA, and if we think about it, money went in, it was never taxed. It gets to come out, it's never taxed.
We don't get a deduction on our tax return, but we also never have the income hit our tax return, which to us that's a more beautiful thing truthfully than getting a deduction somewhere on the tax return because a lot of things are ran off of different numbers on the tax return before deductions ever show up.
It's like Medicare premiums, like how much of our social security is taxed. Back when we were doing these tax rebates during COVID, those were tied to what was your adjusted gross income.
And so, if you had money coming out of an IRA first and hitting your tax return, that can really blow all of these things up whereas it never hitting the tax return ,that's the best answer. That's effectively a tax-free distribution.
And oh, by the way, once you hit your required minimum distribution age, which today, for most people starting as age 72, this satisfies that too. So, this counts against that number of what you're required to take even though it goes directly to charity.
Michael Mason: Yeah guys, I think this is the most under talked about tax benefit and it's not just a tax benefit, it's a charitable benefit, and it's the most under talked about benefit in America.
If you're listening to Wounded Warriors commercials, you'd really like them to put in a blurb and say how much you give from your IRA. We need to educate America on this because you've put this money in pre-tax.
Let's say you have so much in your IRA that there's a $30,000 required mandated distribution and you take that and then you give $10,000 of it to your church. Well, that $30,000 may just put you into the second or third tier of Medicare premiums.
It may have made more of your social security taxable when all you had to do was give $10,000 or $15,000 to your church directly and then you stay under those limits. It's the most under talked about tax benefit in America.
Tommy Blackburn: And with our new higher standard deductions, I guess as John said, not necessarily new anymore, but under the current tax code, we're talking about probably $26,000, be our standard and then we get our overage 65s, maybe that gets us up to $28,000 or $29,000 of a standard deduction.
And my point here is if you took the money out of the IRA, then gave it. You may still not get a tax benefit because you may still be under the standard deduction. So, even more power to why to do it this way. This is definitely … I'm with you Mike. I think all of us want to just scream from the rooftops that this is such an underutilized tool.
John Mason: To make income just go poof like it never happened is a pretty awesome opportunity, and we can't talk about it right now on this podcast.
But as you guys know, when we do our tax planning, it's not uncommon for us to see tax torpedoes. Where additional dollars of income are taxed at over 50% for people that are not in a 50% tax bracket because one doesn't exist.
So, when you talk about net investment income tax and social security taxation, you start throwing in all these nasties, all of a sudden, because you did this the wrong way, you lost the deduction, and that may have been taxed in an additional 50% when you were thinking you were in a marginal rate of 22 to 24.
Michael Mason: And this thing is so frustrating to me because I would guess, and I'm going to use 70% as a number and I'm going to be close. 70% of Americans probably have their taxes prepared for them, and their tax preparers are not having these conversations.
So, what John just said, if your parents, your friends, your siblings are not federal employees, and they don't have state and federal pensions and they're living off of social security, and what they have invested — if you don't tell them to listen to this podcast because this is the area that you can get into a 40 or 50% tax bracket because you gave the wrong way, because all your income is social security.
And guys, I was thinking about this the other night: social security, come January of this next year is going to have had a 15% pay raise.
Over the last two years, we're starting to see people that have delayed social security to FRA (full retirement age) and maybe even 70, having close to $60,000 of social security checks if they've delayed it that long.
And if that's all you have and your spouse is similar, you could have a $100,000 to $120,000 of social security income. And if you're giving the wrong way, you're making that taxable when it wouldn't have been otherwise.
Tommy Blackburn: That situation you just laid out, that's a very powerful one and that's very good planning. And the reason I say it's powerful is because, we could very quickly go from a hundred thousand of tax-free income to a very bad tax situation.
Because as we start layering in more income, as John was alluding to in that tax torpedo, we could be hitting some 50% rates there. It’s an awesome place to be, but it really requires some work once you get there to keep that tax situation under control.
John Mason: Can we circle back real quick, Mike, to what you had said on Wounded Warriors in these commercials, and there's not a lot of advertising out there on donor-advised funds. There's not a lot of advertising on qualified charitable distributions or transferring highly appreciated securities.
Most of it is give me your credit card, we'll charge it monthly, or we'll pick it up weekly at a tithe or maybe, you should consider putting us in your will, and you can do a bequest.
And I have had a client, and I'll just give you a scenario, kind of made up, but true — and I'm just going to leave. I have it in my will, X, Y, Z charity is going to get a hundred thousand dollars at my passing.
Well, what if the financial planner and me says, “I've read your will. I've looked at your assets, your charity's going to get nothing. I don't care what your will says.” What am I talking about? And why are these things like bequest and thinking about leaving assets via will … why are charities making a mistake here?
Michael Mason: Well, first and foremost, the will typically, doesn't control most people's assets; beneficiaries, ownership. If I've named Tommy and John, my beneficiaries and my will says, “Boy, I'd really like York County Baptist Church to get a hundred thousand dollars.” Well, there's no a hundred thousand in my estate to give to them because the beneficiary trumped it.
Tommy Blackburn: Good financial planning would avoid pretty much anything going through that will. So, we may not be anything in that estate to your point.
John Mason: Especially as now most Americans have their wealth in tax-deferred or tax-preference retirement accounts as single owner, my IRA, my Roth IRA. Maybe before if you had just a normal brokerage account for your house, you actually had a a probate estate where that will would've actually controlled something. But in this day and age, it's pretty rare.
Michael Mason: Hey guys, I think we should wrap this up with any kind of lightning round as we go around once or twice. Most important things to take from this podcast.
Tommy Blackburn: If we didn't get a chance to cover it too much, I'll just say that because of QCDs; that's a reason when we're doing Roth conversions, we may limit the amount of Roth conversions we do. Because we don't want to pay taxes on something that we're going to give to charity that's never taxed on it.
Same thing when we're thinking about leaving stuff at our death; let's leave an IRA if we're going to do it that way or part of our IRA because that way, our heirs can get something that's tax preference. The charity gets an asset that it's all the same to them.
Michael Mason: Yeah, I would say don't think, and John said it earlier, that $5,000 a year is a small number, $5000, $7000, $8,000 a year. If you're committed to giving that and you're always going to give it, you should have a financial planner that helps you structure that the best way.
Tommy Blackburn: I'll jump in here. I would say you should have a financial planner that's just as excited about helping you with your charitable giving as you are.
We help our clients all the time, and it may not be that that cause is necessarily near and dear to my heart, that's important to you, but it's just so empowering for us to see clients empowered to do this a better way.
Michael Mason: And as I make my last statement, John, you'll shut it down to your example. If somebody says in their will, “I want to give my charity a hundred grand” and their financial plan can really support that, then we should have the guts to ask that person, “Why wouldn't you give them a hundred thousand today so that they could thank you appropriately, and we can increase the net value of your estate that the other people will inherit because we're going to use some of these tax strategies?”
John Mason: I hope our audience just understands and realizes after 28 episodes that this is what financial planning is. It's tying together federal employee benefits, retirement planning, social security, Medicare, tax planning, charitable giving, helping your children, empowering you to live your best life.
In our experience, guys, not a lot of firms do it the way we do. And we can speculate why that is. It's a lot of work. This activity of helping clients, open donor-advised funds pushing out highly-appreciated securities, layering in Roth conversions to offset the deductions, having these conversations, it's much easier just to invest somebody's money than it is to have these conversations, but it's a lot less rewarding.
And we just hope that if you're listening to this podcast and you're working with somebody that's only managing your money, that you look for somebody better. You look for somebody who's going to take that next step and help you live your life and help your financial plan live your full life to its full potential.
Folks, this has been another episode of the Federal Employee Financial Planning Podcast. Thank you, we’re enjoying those emails we've seen come in to masonfp@masonllc.net.
It's been an awesome year. We're winding down 2022. We thank you for your service as federal employees. We thank you to our veterans who are now federal employees for your service, and we'll be back with you on the next episode of the Federal Employee Financial Planning Podcast.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.