The Optometry Money Podcast Ep 37: Tax Planning For Charitable Giving

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Introduction and Welcome

Evon: Hey everybody. Welcome back to the Optometry Money Podcast. More helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I’m your host, Evon Mendrin, Certified Financial Planner and owner of of Optometry Wealth Advisors. A. No commission fee only financial planning firm just for optometrists nationwide, and hope you are doing well as you are heading towards the end of the year and into the holidays.

Overview of Tax Benefits for Charitable Donations

Evon: Today’s conversation is gonna be all about. Tax benefits and tax planning strategies for donating to charity. Uh, this is about the time of the year, the end of the year where you may be receiving letters from different nonprofits or organizations in your area, uh, or you are regularly donating to a different nonprofit.

That’s important to you or to your church or wherever it is. Uh, or maybe you’re just thinking about what are some of the other tax planning, uh, opportunities you have [00:01:00] as the year comes to a close. Uh, today we’re gonna talk about the benefits, the basic benefits of, uh, of donating to charity. What tax benefits do you get?

Uh, and we’ll talk about different, um, a short list of different tax planning strategies you should think about. As you donate to charity and all of the links and resources that I’m gonna talk about here in the, uh, in the show, um, you can find in the show notes, uh, on our website at the Get Education Hub on our website, Optometry Wealth dot com, along with all the other articles and podcast episodes we’ve put together.

And we’re doing a whole lot of end of year planning and end of year tax planning. Um. Stuff and podcast episodes. So check all that out. And while you’re there, uh, feel free to schedule a no commitment intro call and we can talk about what’s on your mind financially and we can learn about, uh. How we help ODs nationwide, uh, master their cash flow and proactively plan around taxes and student debt and how their practice finances impact the [00:02:00] household and, and everything in between.

And hopefully we can get that conversation started and get to work together in 2023. Uh, but with that, let’s dive into our main topic today. Tax benefits of donating to charity. And let’s start with the basics. What are some of the tax benefits you get for donating to charity? And as I say that, I always wanna highlight, I don’t recommend doing something just for.

The tax benefit. Uh, if you are going to donate to charity, please do it for, uh, because you want to donate your dollars to charity because it’s important to you. ’cause it’s an organization that you support and that’s dear to your values. So, uh, don’t do it just for the tax benefits. But that being said, there are tax benefits to donating money to charity and the amount you can deduct, um, depends on.

What type of organization you’re donating to and what type of stuff you’re donating, whether it’s cash or investments or whatever it may be. [00:03:00]

Understanding Itemized Deductions

Evon: So you do get a tax benefit in turn in, uh, in the way of an itemized tax deduction. And if you think about the, the basics of, uh, of your tax return, of how taxes work.

You always start with your gross income, which is essentially all income from, from almost all sources. You take out a few adjustments if they’re there, and then you have your adjusted gross income and before you apply those tax rates, you get to take a one of two deductions. You get to take a standard deduction amount, a specific amount that everyone gets to take, or you can take an itemized deduction, which is piling up, listing out, uh, certain categories of expenses in your life and, uh, and totaling them up.

And you can take whichever of these two options is higher, whether it’s the standard or your itemized. And those. Those itemized deductions. That list is gonna be your, uh, medical expenses. Uh, if they are over 7.5% of [00:04:00] your a GI, it’s gonna be state and local taxes. It’s gonna be mortgage interest, uh, from, from your home, and it’s gonna be gifts to charity, right?

Those are gonna be the main ones. So add all those up, whichever of these two options are higher, you can take that deduction. So that’s, that’s where, uh, where these gifts to charity benefit your tax return as, as an itemized deduction.

Qualified Charities and Deduction Limits

Evon: And today we’re gonna be talking about qualified charities. Uh, these are in, in the Iris’s terms.

It’s, it’s organizations that are set up for charitable, religious, educational. Um, scientific or literary purposes or for the prevention of cruelty to children or animals or churches, synagogues, or other religious organizations. So a lot of the main charities that you’re gonna see in your everyday life, not like private foundations or things like that.

So we’re gonna talk about these qualified charities and the amount that you can take as a standard deduction is [00:05:00] limited based on, uh, what you’re actually giving to that charity. Uh. If you are donating cash. You are limited to 60% of your adjusted gross income, right? So there’s a limitation of up to 60% that you can take as a deduction, as an itemized deduction, and that’s through 2025.

After 2025, I believe it goes back to 50%. So that’s with cash. Uh, if you’re donating a long-term capital gain asset, which is, uh, in an asset or investment that you’ve held for longer than a year, and if you sold it, it would create a long-term capital gain. Uh. You’re limited to 30% of your a GI if you are donating something that is an ordinary income property.

So if you, if you, uh, something you’ve held for under a year or if you’ve sold it would per, uh, would produce a, a gain that would be taxed like your salary and all of your other income. Uh, that’s limited to [00:06:00] 50% of a GI. And if you’re curious to learn more about what long-term gains are and what short-term gains are, I just did a podcast, um, episode about that specific topic.

So I’ll throw a link to that in the show notes. You can take a look at that and, and learn more about that. But there’s a limitation that, uh, if you’re donating cash, you can, you can take a deduction for up to 60% of a GI. Uh, long-term capital gain property is gonna be 30% of a GI and ordinary income property is gonna be 50% of a GI.

And if you’re donating cash, I mean, rarely are you, I think rarely are you gonna be getting up to that limit. Uh, I would question whether it makes sense from a tax planning standpoint to donate that much. But those limits exist and those are generalities. There are, there are a lot of different, um, specifics about how that works, but those are the general rules.

And if you’re wondering whether the organization you’re donating to is a qualified charity, a tax exempt organization, you can use [00:07:00] the IRS’s tax exempt organization search. And uh, they have a tool there you can go to and you can search for that organization. You can see whether it is or whether it isn’t a, a truly uh, qualified charity.

So I’ll throw a link to that in the show notes as well. Hopefully that’s something that’s useful for you. Anything that you donate above and beyond those limits can then be carried over for the next five tax years, right? So it doesn’t go to waste, it’s not gone, it’s just carried over for the next five years.

So there is a tax benefit for donating to charity. It ends up as an itemized tax deduction. And if you are a, uh, private practice owner, or if you are self-employed and you are thinking of donating through your, uh, through your business. So if you are a sole proprietor or if you are an LLC or, or if you are a taxed as a partnership or taxed as an S corporation, if you donate through your business, that deduction’s gonna pass through your business and [00:08:00] end up on your personal tax return too, right?

So it’s at the end of the day, it’s gonna end up through, uh, going through your business and landing in that same place. So, uh, for example, if you own an S corporation, you’re gonna see that go through with your K one and pass through onto your 10 40, your personal tax return, right? So, so you get a, an itemized tax deduction as a benefit for donating to charity.

But there is a problem. There’s a problem. And what is the problem? Well, after the Tax Cuts and Jobs Act, uh, which was at the end of 2017. Most people now are taking the standard deduction amount instead of itemized deductions. Uh, the reason is because the tax cuts and Jobs act increased the standard deduction amount to an amount that’s more than most people are actually itemizing, uh, on their tax returns.

So for 2022. Uh, if you’re single or married, filing [00:09:00] taxes separately, for example, for student loans, uh, your standard deduction is gonna be 12,950. If you’re married, that standard deduction’s gonna be 25,900 for 2022. And, uh, that is gonna end up as a higher amount. Remember, you’re taking the higher of the two.

So that’s gonna end up as a higher amount than most people are actually itemizing, uh, each year on their taxes. And if that’s the case, that means you’re not actually getting a benefit from a tax standpoint. Remember specifically a tax standpoint for donating to charity, or even from owning a house and having a mortgage on the house.

So that’s, uh, that’s problem number one. Another thing that came out of the Tax Cuts and Jobs Act is that it limited state and local taxes on your itemized, uh, your itemized deductions to $10,000. So if you live in California or [00:10:00] New York or some other state with really high state income taxes, that’s gonna limit the amount you can take on your itemized deductions.

So the problem is a lot of you, uh, are really not getting that tax benefit for donating to charity. So what are some things we can do, right? Knowing that that’s the case, knowing that you want to continue to donate, but we wanna try to get as much tax benefit out of that as we can. What are some things we can do?

Well, there are some strategists to think about.

Strategies for Maximizing Tax Benefits

Evon: The first one I want to think about is going to be bunching donations to charity into one year. So let’s say for example, you were donating, um, let’s say $10,000 a year in total to the different charities throughout the year. And every year you’re donating $10,000, but every year you’re also falling short of that standard, uh, of that standard deduction amount.

Let’s say you’re married and all of your itemized deductions, your, your, uh, mortgage interest, state and local taxes. Your [00:11:00] donations are at $20,000 every year, but your standard deduction is. 26,000 roughly. Right? You’re just falling short of that each and every year. What if in instead of donating every year.

You bunch these donations up and you donate every other year or every third year, so you can donate a higher dollar amount in one single year than you would each and every year. And what’s the benefit of that? Well, on the years you’re not donating, you’re still getting the benefit of the standard deduction, right?

So you’re still getting that same deduction amount you were getting already, but in that every other year, in that one year that you’re bunching up these de uh, donations to charities. You get a much higher, potentially much higher deduction amount as a, as an itemized deductions, which means that you get to take full advantage of those donations to charity and also your state and local taxes, and also your, um, your mortgage interest, right?

So [00:12:00] by bundling them up, bunching them up into one tax year every other year or whatever it may be, you can still take advantage of that standard deduction, but every other year or so get that much higher. Deduction amount, right? So that’s, that’s something to think about there. Uh, so the next thing to consider is donating appreciated assets or appreciated shares.

Right? So, so what does that mean? Well, let’s say for example, you have a taxable investment account and the investments inside of that account have gone up in value, right? They’ve appreciated, and you were gonna donate cash, or in even the worst case scenario, you were gonna sell some of those investments in order to create cash to donate.

Well, instead of doing that, instead of donating to cash, why not instead donate shares that have gone up in value directly to the charity? What would be the benefit of that? Well, number one is that you can take investments that have gone up a lot in value and [00:13:00] donate them directly to the charity, and you would not have to worry about creating capital gain for selling those shares.

The charity, on the other hand, can take those shares. Um, continue to manage them or invest them or sell ’em and not have to pay any income taxes as a nonprofit, right? So you don’t have to sell those shares to create income. And the charity can take those and they don’t have to pay income taxes at all. So that’s the benefit there.

And you can use the cash that you otherwise would have donated, reinvest it back into the account, and you now, uh, have reset your cost basis on that investment. You have a lower gain now. So that’s a, that’s a benefit there. This can work especially well if you are, uh, needing to rebalance in that account.

So let’s say for example, you have a mutual fund or ETF, you had a fund or a category that’s much higher than you should have based on, uh, your investment portfolio, but you’ve hesitated to sell it and trim it because of the tax, uh, consequences. [00:14:00] Well, you can donate some of those shares directly to charity.

Use your cash to reinvest in that account and get your portfolio back in balance. And you can do that without having to sell shares and create income capital gains that end up on your tax return. So something to consider is donating appreciated shares of investments or assets, um, directly to charity.

Uh, something else to think about is if you have assets that have gone down in value. So you have, uh, you have investments at a loss, which is very possible. Uh, after this year, you don’t wanna donate those shares directly. You actually want to first sell those shares, book that loss for your own tax purposes, and then donate the cash directly, right?

So keep an eye on if you’re, if you have, uh, things for loss, you really want to actually instead sell those, uh, take those losses for yourself. So that’s something to take a look at. The next thing to look at is, is what if [00:15:00] you didn’t want to donate and bunch those donations in one year, right? What if you didn’t wanna do one lump sum every couple of years?

What if you wanted that charity to receive those donations every year so they knew they can rely on it for operations? Or what if you didn’t know which charity you wanted to donate to, but you still wanted to get that tax deduction this year? Or what if you wanted to change, uh, which charity they went to in the future?

Donor-Advised Funds Explained

Evon: Well, this is all something that can be helped by using a donor advised fund. A donor-advised fund is a charitable fund that you can set up an account app and it’s maintained and operated by nonprofits so it, it itself will operate as a nonprofit. And that means that you get the deduction for donating to that donor-advised fund in the year you put money into it.

And, uh, and so let’s say you, you, um, set up an account at a donor-advised fund this year and you [00:16:00] put the cash in that account before 1231 of 2022. You get that charitable deduction. Uh, for the year you do it and you get to tell that donor advice fund, which charity you want the funds to go to and when and how often.

So instead of a lump sum in one year, you can tell that donor advice fund to send dollars, uh, every year, spread it out over the next several years. Uh, you can also change charities down the road, or, uh, because funds in the donor advice funds can be invested and can continue to be invested and managed, um, you can just wait and simply continue to have the funds grow and select a charity, uh, down the road.

So, uh, donor-advised funds can be really great tools. If you want to bunch your donations, you wanna, uh, bundle them up into one year, but you wanna spread out those donations over future years or change charities or just keep more control over [00:17:00] where they want to go. Uh, and this can be cash, it can be investments, so you can transfer those appreciated shares directly into the donor-advised fund.

It’s important to say that technically the funds are not in your control, right? Uh, you don’t own them technically, that donor-advised fund doesn’t have to listen to you. But it would probably be, uh, probably be a, not a great business practice to ignore, uh, the people using their accounts. So, uh, you’re able to advise and suggest to that fund where it should go and how often.

Um, so those are pretty great tools. Donor-advised funds, something to think about as well.

Charitable Giving and Estate Planning

Evon: Uh, next thing to think about is it doesn’t really have a direct benefit this year, but, uh, really down the road is how do charities fit into your estate planning? There are ways to use estate planning to get a tax deduction this year as part of giving to, to different charities and nonprofits.

Um, you can take a deduction today for assets that won’t actually transfer to, to the [00:18:00] charity until. Into the future. You know, for example, you can have an arrangement where you get to benefit or use a property or a fund throughout your lifetime, and the remainder goes to the charity at, at the end of your life.

An example that’s like a charitable remainder trust, or, or you can do that by deed or something like that. But that’s, that’s usually more complicated planning. That doesn’t really apply to everyone. Um, and that’s, you should have careful conversations with your own professional team, your, your attorney, and tax pro, and your financial advisor.

But for this conversation, I, I just wanna think more generally and broadly about where charities fit in with your estate plan. If they do at all. They don’t necessarily need to, but if you do have charities, whether it’s your, your church or, or some other nonprofit, uh, or, or organization, if you do have charities as a part of your estate plan, be mindful about which assets those charities are actually getting, uh, versus like your heirs, your, your kids, or whoever that is.

Uh, for example, if you have [00:19:00] different types of assets, you may have a, uh, pre-tax retirement account. You may have a Roth Roth retirement account. Um, you may have a house, you may have a taxable investment account, life insurance proceeds. Maybe you own a private practice, some real estate, right? You have all these different types of assets.

Um, you have some going by beneficiaries, some are in a living trust, perhaps. You know, you wanna think about are the right assets going to, to charity versus are the right assets going to your heirs? Uh, you know, one example, this is something I see is, uh, you may have a, a nicely built up pre-tax retirement account, like your 401k or something like that, right?

And you may have a Roth IRA and you also may have some life insurance proceeds. Well, something I see is that sometimes the a, a living trust. We will name a charity as a beneficiary, and that that living trust is gonna have like your, your residence and your life insurance and different things like [00:20:00] that, those after tax assets.

Uh, and then your, your pre-tax retirement account, like a, like a 401k or traditional IRA. Your kids are named as beneficiaries. You wanna think about that at some point, you wanna make sure that, um, and really think about, talk with your professionals to see, well, does it make sense to instead name the charities as a beneficiary on your pre-tax retirement account and have your kids get the full benefit of those after tax assets, like your life insurance proceeds and your house and taxable investment account and, and other things like that.

The reason that might make sense is that again, that charity can take that pre-tax retirement account, use those funds and not have to pay any tax on it. Whereas as your, um, if your children were to inherit it, they would eventually have to pay tax on it. It would be taxable income to them, whatever they’re withdrawing from the account.

And after tax assets like your house [00:21:00] or, um, taxable investment accounts. Um, the, the, uh, the basis steps up to whatever the value is at your death. And essentially what that means is that any gains are wiped out. Uh, and so they can take and sell those assets immediately, you know, right away and, and maybe not have any taxable income from that.

And life insurance, as you, as you probably know, is, is going to be, uh, tax free already. So just think about as a part of your overall estate planning. Whether charities should fit in, where do they fit in and, and are they getting the right assets? Does that make sense? Uh, and that’s, that’s part of a larger estate planning conversation that you should have really regularly ongoing throughout your lifetime.

Qualified Charitable Distributions

Evon: Um, one last thing I’ll mention is, is qualified charitable distributions. And this is probably that, that, uh, something that no one listening to this is gonna take advantage of. But I, I do feel like no conversation around charitable giving is complete without mentioning this at least. So what a [00:22:00] QCD is, a charitable qualified distribution is, is that, uh, if you are age 70 and a half or older, uh, you can send funds directly from your pre-tax retirement account, your traditional IRA specifically, and send it to a, um.

To a nonprofit directly, and the amount that you send directly from your traditional IRA over to that charity is not taxable income. Not like it would be if you withdrew the funds and then gave it to the charity. Right? So that’s a qualified charitable distribution, sending funds from your pre-tax traditional IRA directly to the charity.

And when you get to age 70 and a half or later, you can do up to a hundred thousand dollars of that per year. Uh, the biggest benefit I see there is that when you get to, to the years where you have to start taking required minimum distributions from those pre-tax retirement accounts. Uh, at age 72 or later, as of today’s [00:23:00] laws, those qcd actually satisfy, uh, those required distribution amounts so you don’t get a deduction from it on your itemized deductions, but it’s essentially acting like a deduction because you, um, you don’t need to withdraw the fronts from the accounts.

And, uh, it doesn’t show up on your tax return. So that’s something to consider as you are getting to that age in your life, uh, is a qualified charitable distribution. So one last thing to mention here is that, okay, we’re planning for charitable deductions, right? You’re, you’re getting a deduction from your income.

You can pair charitable distribution or uh, charitable contributions. You can, you can pair your donations to nonprofits with other items of income to offset it. So let’s say you, uh, you want to do a Roth IRA conversion, right? You, you wanna transfer funds from a pre-tax retirement account over to a Roth IRA, so that.

Those funds will continue to grow tax free in in [00:24:00] retirement. As long as the rules are followed, the all of the growth can be withdrawn, tax free. Or maybe you can do this in your 401k, right? Let’s say you wanna do that, well, you can make an especially high donation to charity. In that year, in that same year that you do Roth IRA conversions or Roth conversions in the 401k, right?

So you can pair these two together to sort of proactively do some tax planning there on your investment side or, uh, or maybe you are, uh, planning for an especially high tax year. And you are a business owner or practice owner or self-employed, uh, an independent contractor, and you are, um, going to start phasing out of the qualified business income deduction, the QBI deduction.

Maybe your taxable income’s gonna get too high so you can use a. Uh, a special donation to charity within that year to sort of bring your taxable income down and increase that QBI deduction, right? So you can, you can use these charitable deductions in order to offset other particular income items or [00:25:00] other particular planning items.

So something to keep in mind.

Final Thoughts and Contact Information

Evon: And the reality is tax planning, whether it’s it’s donations to charity, whether it’s, uh, planning to purchase assets or equipment in your business, and wondering what you should do with that deduction. Whether it’s converting Roth, uh, Roth conversions. Whatever it is, tax planning needs to be thought about, um, throughout the year, and it needs to be thought about over several years and, and really over your lifetime, right?

Don’t, don’t just think about lowering taxes in one single year in isolation. Think about tax planning as it relates to, to over the next several years of your life. And preferably over the rest of your life, right? You wanna take advantage of opportunities over your whole lifetime as they come. But that’s the very basics of some things to think about as you are donating to charity.

Again, uh, do it because you want to, and it’s meaningful to you and it’s, it aligns with your values. But if you’re gonna do it, you can do it sometimes in a more tax favorable way. So hopefully this was helpful for you. [00:26:00] There’s a whole lot of other details and, and information to sort through. So of course, uh, don’t take my word for it.

Don’t take this as advice. Go talk to your own financial advisor and your tax pro and attorney where it makes sense and get their guidance on this. Uh, look through your own tax projection, do what makes sense, but hopefully as we get to the end of the year, that is helpful. If you have any questions on anything I talked about today, of course, send me an email Evon, EVON, at Optometry Wealth dot com.

Or if you have ideas or topics for future episodes, reach out to me as well. Um, and with that, wish you all the best for you and your family and your practice and everyone else in your life, uh, as we get to the holidays. Happy holidays to you and, uh, happy New Year as we get towards the new year. With that, we’ll catch you on the next episode and.

Take care. Want more resources to help master your money? Check out the Education Hub on Yvonne’s website at Optometry Wealth dot com. Evon Mendrin is a [00:27:00] Certified Financial Planner and owner of Optometry Wealth Advisors, a California registered investment advisor. All opinions of Evon and his guests are their own.

This shows for informational purposes only and should not be reliant on for specific investment, legal, tax, or other decisions. Clients of OWA May own securities mentioned on the show.