More Knowledge, More Wealth - Ep. 166: Donating to Charity
Ep. 166: Donating to Charity
[00:00:00] Gabe: Good afternoon. This is Gabriel Shahin, certified financial planner and your host, more Knowledge, more Wealth here and every weekend talking about all important topics of personal. Our goal is to give you the knowledge you need to increase your wealth. Now to the listener, you can always reach out to ourself, any one of our colleagues here.
[00:00:16] Our phone number is (855) 963-2526. That's 8 5 5 96 Falcon like the Bird, or visit our website at falconwealthplanning.com. That's falcon wp.com for short. Now I'm the principal of Falcon Wealth. We are a fee only, not fee based, not commission based, fee only registered investment advisory firm. We are independent.
[00:00:43] We do investment management as well. But folks, we specialize in everything that involves a dollar sign that goes over where you are today, how your money's looking, how much and how long can it last Going over taxes, investment to state planning insurance, folks, you name it. Anything that involves a dollar sign, we can help.
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[00:01:23] We'd love to help folks. First and foremost, happy Thanksgiving to you guys. Hopefully you had a great time with the family and we are entering the holiday season. And guys, you are gonna blink and we're gonna be at the end of the year. And what we have this past Tuesday was something called, I, I feel like it's new to me, but like giving Tuesday, everybody's giving donations Today I got messages from multiple organizations.
[00:01:46] Uh, so I want to give you idea. Of, and some of you by the way, may be doing your giving by the end of the year, uh, and some of you might be doing it the early of next year. So any way you look at it, this is a good time to bring this up. And these are strategies for giving. This is straight for people who are charitably inclined.
[00:02:04] Okay? So that's first and foremost. So I'm gonna talk about a few different things today, mostly having to do about charity and what are the most tax efficient ways to do it. First you have to understand the benefits of doing so. Now I understand the spiritual benefits, the benefits of helping. But listen, I'm a financial planner.
[00:02:22] I'm a tax planner. So my job is to make sure you save money. So the first way, the most common way people give to an organization, let's say you want to give a hundred dollars, is they pay with a check. They pay with cash, or they have it run their credit card. Okay? So yes, that is a great way to do it cuz you still potentially get the tax write off.
[00:02:40] You have to understand if you are doing a standard. Deduction or an itemized deduction, that is extremely crucial because if you are itemizing, then yes, of course that will naturally help you. If you're taking a standard deduction, the government gives you a standard deduction amount between 300 to $600, depending if you are, uh, married or single.
[00:03:00] So you have to see if how much you're giving. Cuz if you're giving over that amount, then it's not financially. Okay, so that's where you have to consult your tax advisor. That's first and for most, okay? Now, yet again, you give from the goodness of your heart, but you also wanna make sure you're getting tax benefits in the process.
[00:03:18] I mean, why? I mean it, well, who would you rather give the money to? The charity or the government, right? I mean, who would you rather have? The financial benefits? You or the government, right? So you want you to have it. The more you have, the more you can even give more in a charity. You get what I'm saying?
[00:03:34] So let's discuss further. So cash donations make sense to a lot of us, but let's talk about other strategies you can do that can help your financial situation by giving money to charity. Now, keep in mind, all the strategies that I'm gonna talk to you about today are all legal. Number one, allowable.
[00:03:51] Number two is the only loser in this whole thing is the irs. Okay? So the charity wins. They get the money you win, you get the tax benefits. The IRS is the only loser in this. The first benefits you could do is you can give and donate stocks. Appreciated stocks, not any stocks appreciated. Stock. Let's say you bought, tested that $300 and now it's at $3,000, so you can donate.
[00:04:21] A partial share. Even obviously the shares are much lower than that, but you invested $300 and now the Tesla stock is worth 3000. You can give, let's say if you wanted a hundred bucks, you could donate a hundred dollars worth of stock of Tesla, and so you could do that also with. The s and p 500, you could do that with any investment possible.
[00:04:40] You could do shares and fractional shares depending on who you're sending it to. So this could make a lot of sense for you. Why? Because let's just say in that example, you bought something for $300 and it's now worth 3000, and you want to donate $3,000. Instead of writing a check for 3000, you could donate the stock for 3000, the check you were gonna use.
[00:05:01] Give to the charity, you could actually repurchase the stock for $3,000 worth. So why would you do that? Because if you didn't do that and you later sell, decide to sell that stock, well, think about it. You bought it for 300, it's worth 3000. That's $2,700 in capital gains. If you live in a state like California, and depending on your tax bracket, you could be paying up to 33% in taxes.
[00:05:27] You get what I'm saying? You could be paying. Up to $900 in taxes to sell that investment. But if you give it to a charity, you pay nothing. You still get the full write off of the 3000 by the way. But you avoid paying the capital gains tax and the 3000 you were gonna give them. What did you do instead of your cost base is 300 before now it's 3000 cuz you rebought $3,000 share.
[00:05:50] Worth of it. So that is another fantastic strategy. By the way, folks, if you're just joining us, you're listening to Gabriel Shahin certified financial planner and your host of More knowledge, more Wealth than you own every weekend. Talking about all important topics of personal finance today, we just talked about, uh, uh, having a stock donation to a charity.
[00:06:06] Now, let's say the charity, it's maybe a small. Organization. They don't have a brokerage account for you to donate to. What you can do is open up a donor advised fund. You can open these up at Fidelity Schwab. A lot of custodians offer these, and you can donate in that example $3,000 of stock into that donor advised fund.
[00:06:26] So that is another option that you can do. So that could be very helpful and make a lot of sense for you to do that because for two reasons. Number one, it goes three, the stock goes into. 3000. Then you could sell, let's say $500 worth and give it to the charity and you still get the full write off of the 3000.
[00:06:45] That 3000 stays in there, or in that case, 2,500 cuz he donated 500 and it could be used for future years. Some people, because they're doing a standard deduction, will donate maybe five to 10 years worth of what they give, so they can get one big write off in one year. Some people also do that if they're.
[00:07:03] in future years. So they're in a high tax bracket now. They'll be in a low tax bracket later. They want the write off at 33% versus 12 later. So you could pre-fund future donations in this donor by on, so you get the benefit of that. Number two, you have a pre-funding amount. Number three, you can actually donate.
[00:07:23] Appreciated stock in there as well. So this is a fantastic way where you can put money in that fund, that donor advised fund, and then from there, sent to a. of your choice, so that can make a lot of sense for you. Now, couple things. Some donor vice funds have you force mandatory withdrawals, so you would have to withdraw roughly 5% of what's in there on an annual basis and give it to a charity.
[00:07:49] So if you put a hundred thousand dollars in there, you would have to give 5,000 a year to a charity of your choice. Now, let's say, God forbid, something happens to you, you can leave somebody else in charge to give to a charity of their choice, or you could just leave the beneficiary on there, an actual charity and it goes to them.
[00:08:04] So you have many options there. So you're really in full control there. You just get the full tax benefits of pre-funding it, uh, and you could still put, like I said, appreciated. In there. Let me talk about the third benefit. Now, this really only works for people that are over the age of 70 and a half. You are allowed to, if you have a IRA or 401K or retirement account, you are allowed to take part of your required minimum distribution.
[00:08:32] Now you have a hundred thousand dollars. It's roughly, we'll call it 4%. Okay? By the way, the older you get, the higher that withdrawal percentage get. Let's just say at 80 years old, let's say for simplicity it's 6% and 90 years. , uh, it's 10%. Let's say at 115 years old, it's 50%. You get what I'm saying? The IRS wants to force you to take money out.
[00:08:54] Of that account. Now at 70 and a half, you are allowed to give up to a hundred thousand dollars of your required minimum distribution. Man, that means you have a lot in there. You know what I'm saying? That's a lot, right? If you had 2 million in there, 4% withdrawals, 80,000, so you're looking at about a 2.5 million account, and this assumes you have enough money where you don't need to live off of it.
[00:09:15] You can go ahead and. Qualified charitable distribution. So the RMD is when you're 70 and a half, the QCD is going to a charity. You do a qualified charitable distribution to give directly to the charity. The benefit of that is you never touch the money, so you don't have to worry about the standard deduction.
[00:09:32] The itemized deduction. It will show on your taxes you took a hundred thousand out, or 10,000 out or a thousand out, and you have zero tax. That's great because it doesn't hit towards your Medicare premiums. It doesn't hit to your taxation and social security. It doesn't. For your agi, which affects certain deductions.
[00:09:49] This is a fantastic tool, a fantastic option for you to make sure that you can give to the charity of your choice. So this is great because why? Yet again, use after tax dollars from your chicken account. You get what I'm saying? Your checking account is after tax. Let's say you make 10,000 a month, you might only clear 7,000 net of taxes, so whatever's in your savings account has already been taxed.
[00:10:13] So what's my. Well, why use your after tax dollars? Use Priest tax dollars and take it out tax free because it's going to a charity of your choice. And remember this, folks, your money goes three places. Your job is to choose two of the three. Your money goes to yourself, right? That makes sense. Number two goes to a government, a irs, and number three goes to charity.
[00:10:33] Your job is to choose two of the three. All I'm suggesting is you can use charity versus the irs. You complain about paying high in taxes. Well give all your money to. You won't pay taxes. You get what I'm saying? So this could make a lot of sense. Take advantage. And folks, if you need help with this, if all these strategies sound great, something you want to do, maybe you tie it, maybe you give to a charity on a regular basis, folks, give us a call.
[00:10:54] We can help develop a charitable plan for you, especially at this time of the year. It's a fantastic time to start doing charitable planning and there are strategic ways you can legally reduce your taxes. And what we're gonna talk. Next, uh, segment is additional strategies that you could do where you can live off income, off charitable deductions while still getting the write off, or you could take money outta your estate or in addition to that, that these are for high income individuals.
[00:11:21] You can also, uh, discuss other mechanisms where if you wanted to do, uh, additional philanthropy work, uh, you can get some recognition as well. So we'll talk about that after a few words, but if you want help with this, folks, give us a call. Would love. Our phone number is (855) 963-2526. That's 8 5 5 96.
[00:11:41] Falcon like the bird folks will be right back after a few words.
[00:11:45] Welcome back folks. This is Gabriel Shahin, certified financial planner and your host, more Knowledge, more Wealth on every weekend, talking about all important topics of personal finance. And today we are talking about just because of the season of giving, we are talking about charitable donations and what could make sense for you if you're in fact charitably inclined.
[00:12:03] Now keep in mind, a lot of these strategies are designed for larger donations, and the IRS even acknowledges this. For example, if you give a donation under $250, Uh, charity is not required to give you a receipt for it, so the IRS technically can't ask you for the receipt. And I'll give you two examples.
[00:12:21] One example is if I sometimes go to a restaurant and they say, do you want to donate, uh, a dollar to St. Jude's or round up a. To the closest dollar, uh, for St. Jude's, uh, which is a children's hospital. I got children, so that's always close to my heart. If they ask me, I do it every time. You think I'm gonna hold onto that receipt for the irs?
[00:12:39] Do you think they want me to hold onto that receipt? Absolutely not. They're, they're gonna do that so, That's a good example of that. In addition to that is like, let's say ti the season, right? So you go to the post office, you're sending something out, you come out and you see Big Santa Claus ringing a bell saying to donate, well, you give 'em the change in your pocket, you're gonna shake 'em down for a receipt.
[00:13:00] No, you're not gonna shake 'em down for a receipt and the IRS doesn't want you to shake 'em down for a receipt. So this really only matters for, I'll go as far as saying gifts over a hundred dollars, ideally over $250, cuz then it is documented as a charitable gift. So by doing this, A lot of those strategies I talked about earlier through donating stock using a donor vice fund and required minimum distribution slash uh, qualified charitable distribution, which is that RMD slash Q C D when you're 70 and a half.
[00:13:29] Keep in mind, RMDs now are at 72 years old, but that Q C D tax strategy, charitable strategy is still available at 70 and a half years old, which is fantastic for some of you guys that are. Now another thing that I've seen work out really well is people who pledge money. Now you're allowed to do pledges and pay it over a period of time.
[00:13:51] So some people want to do, have the recognition now, want to help, now want the charity to be able to account on that money. But for various reasons, there might be a larger taxable event in the future. So they make the pledge today and they donate a bit later. So that also could be something, uh, just to take into consideration frankly, of.
[00:14:11] Uh, future tax donations and the future tax benefits that it could have as pledges. I've also seen people who make such a large pledge as something, depending on the organization, it could be 50,000. I've seen some 300,000. I've seen some obviously much more, where you can ask for a memorial. You can ask for them to name a conference room after you or your loved one, or somebody who's passed, or a family.
[00:14:36] Something like that could make. Of sense. And so you may want that additional recognition for show, for proof, for legacy, for so on and so forth. And a lot of people have seen this at, uh, at community centers. They've seen this at universities, they've seen these at hospitals. So this is something you can do if you really want to give back in memory of somebody else.
[00:14:57] But I wanna talk about two additional strategies that could. And these, there's two of them here because there's, on one side, there's somebody who's already realized the taxable event. Let's say you sold the business ahead. Let's say you won the lottery 2 billion. Remember that you won the lottery and now you wanna find a way to do some charitable planning.
[00:15:15] What you could do is you can give the. Money for that. You can give that to the charity and they live off the income. Not all of it, but let's say you put a million dollars in there, you get a million dollar tax right off. The charity lives off the income off that. Now, there's many asterisks behind that.
[00:15:35] You could still make money on it if you backend the payments, or you could just do equal out, but it removes out of your estate. For the ultra wealthy that is important and the money comes back to whoever you want it to go back to. It could come back to you or it could go back to heirs. This could be a great way to get an instant tax write off.
[00:15:51] Yet again, if you're in a high tax state, like the state of California, you could be paying up to 55 cents on the. For every dollar you make, you make a million dollars, you can have 55,000 or 550,000 in taxes. So if you donate a million dollars, you could save 550,000 in taxes. Yet again, the only loser here is the irs.
[00:16:13] So this can make a lot of sense and if you strategically do it and are comfortable leaving that money in for over 7, 10, 20 plus years, this could make a lot of sense cuz you could potentially even make money on the back end depending on how you structure the pay. If you go 30 years, you can actually make a lot more.
[00:16:32] You got the right off on the front end and on the back end you actually got to appreciate your investments, get to appreciate over time, so you could take advantage of that. This could make a lot of sense for you, especially for those who've had a taxable debt. And think about it. You've given this money, the income stream of this money to.
[00:16:51] Think about how great that is and how many people you could help depending on the situation. By the way, folks, if you're just joining us, you're listening to Gabriel Shahin, certified financial planner and your host of More Knowledge, more Wealth here on every weekend, talking about all important topics of personal finance.
[00:17:04] And today we're talking about just the charitable planning aspect of it. , and I love going over this because truly nonprofits do great things. They help people in need, they help others. They really help give back to the community and so on. So I was very involved into the Y M C A when I was younger. I played basketball there almost every day in the summertime, and thank God for that.
[00:17:24] I lived in Arizona for 20 years. It was pretty hot to play outside in summer. You get what I'm saying? So indoor basketball was absolutely necessary. Now, with that being. the final tax. Uh, and by the way, there are many tax strategies and charitable, uh, strategies you can do. But the last one is another charitable trust you can do.
[00:17:45] And this tax exempt trust is also important. Now, this is for somebody who knows they're gonna sell it and what they get. This is, a lot of the time I see this with either very low stocks or real estate. And I'll give you an example with real estate. Let's say the family had this property they bought for 300,000 back in the seventies.
[00:18:01] And now it's worth 3 million. Now they've depreciated that 300,000 down to a hundred thousand, so they have to repay the tax on what they wrote off originally. They call that, by the way, depreciation recapture. So now the cost basis, we'll call it a hundred thousand, it's worth 3 million. That's $2.9 million in capital gains tax, roughly.
[00:18:21] Now they're gonna have to pay the tax on that. Roughly one third of that would go to the government, so we'll call it a million dollars in taxes. What this people can do is they can take. Property retitle it into a tax exempt trust and that tax exempt trust would then be able to sell the property and pay virtually no tax.
[00:18:44] Why is that important? Especially depending on the situation. Why is that important? Is because you can then the person who gave the donation, gave the property to this tax exempt trust can live, they can live off the income for life. Now, if they're 65 years old and they're. , they could potentially have 150, $180,000 being paid out to them on an annual basis.
[00:19:06] That's like 15,000 a month on an annual basis. Now there's a cash to this because you get a right off on the front end, you get a right off because you said that this money, part of it's gonna be earmarked for charity and this example, 10% of it is gonna be remaining for. now you get a write off, you've donated $3 million, you get a write off of $300,000 depending on your tax bracket, you can save over 150,000.
[00:19:34] Some people actually say, Hey, that's a great write off. Let me create income cuz I don't have 300,000 of income. So they do a Roth conversion, they take money outta their 401k or their ira, move it into a Roth. How great is that? That's fantastic. That can make a lot of sense Now to continue on this strategy.
[00:19:52] They can take that 150, 180,000, whatever it may be, depending on their age, and then they could take that throughout the rest of their life. Let's say it liquidates the whole thing. Let's say it's appreciated over time, they took out way more than 3 million. They're taken 6 million out, right? Cuz they make money on an annual basis.
[00:20:10] Well that's fine because they had their intent since day one was to leave money to a charity of their choice. Let's say their idea was to have 10% remaining, 300,000. Well, if there's only 150,000 remaining, that's fine. Cause the original intent was to have 300,000 and they still get the write off 10, 20, 30 years short later with their original intent of 300,000 going towards charity.
[00:20:38] Now, here is the catch. Let's say day one, after collecting your 15,000 month, you die and your spouse dies. God forbid. All that money goes to the charity, none to your heirs. So some people, what they've done to avoid that risk is they buy life insurance on themselves. Now, I'm not a big component of life insurance, frankly, I hate life insurance.
[00:21:03] It's a waste of money. But in a situation like this where you're worried that your ears would get nothing, you could buy a 3 million less than die policy. Now, depending on your health, that could range from 15,000 to 30,000 a. now that right there would come from the 15,000 a month that you're already getting.
[00:21:22] Any way you slice it, it's better than paying 33% in tax, and you could be living off that money your whole life and your heirs will still get $3 million upon your passing. Folks, this strategy could make a lot of sense depending on your tax bracket, depending on your charit giving, depending on your.
[00:21:45] Depending on the asset. This is why it's so important to talk to a financial professional, somebody who does this on a daily basis, to take a look at your situation, analyze it, and make a recommendation of what you should be doing. But I don't see a lot of people doing that. I see a lot of people just do it on your own.
[00:22:02] They just sell. They just, just don't even think about it. And it's sad because the winner in that situation is not you. It's not the charity, it's not the financial planner help, and you're the tax liner. It's the irs. You know why people complain about taxes cuz they're ignorant to the fact of how it works.
[00:22:19] My recommendation to you is talk to a professional, talk to a tax advisor, talk to a financial professional. Folks, that's what we are, and we can help and we can help all across the country as well. We have offices all over, give us a call. We are offering one to two meetings, one to two hours of our time at no cost.
[00:22:38] Folks, here's the time to call. It's perfect time of the year to do it. Phone number here is eight 50. 9 6 3 25 26. That's 8 5 5 96 Falcon like the Bird, or visit our website@falconwealthplanning.com. That's falcon wp.com for short. Folks, that was a fast, fast show. All of these could be easily related to you guys.
[00:23:05] If you need help with that, you can reach out to myself or one of our colleagues here at Falcon Wealth Planning. Like I said, we got. All over our headquarters is here in Southern California. We can help no matter where you are. If we have offices all across, we would love to help. Give us an opportunity, we can have a personal confidential conversation to help relate this show to your specific information, to your specific situation.
[00:23:30] Reach out, would love to do it. Folks, have a great week, have a great weekend, have a fantastic holiday season, and we look forward to serving you, God.