Generosity is in the DNA of many in KC. Adviser’s advice is don’t ignore tax benefits

It can seem cliche at this point to talk about the challenges many are facing “in times like these,” but the truth of the matter is that many people here in the U.S. and abroad are not as fortunate as most reading this.

While not everyone feels called to use their surplus to help, many here in the Kansas City area have generosity in their DNA. Giving shouldn’t be done purely for the tax benefit, but several strategies can help minimize tax burden and maximize the impact you can have.

Charitable bunching

Several years ago, tax legislation increased the standard deduction substantially and many people who had enjoyed itemizing their deductions found this no longer was an option.

For 2021, the standard deduction for taxpayers filing jointly is $25,100. For many givers, this means that more (if not all) of their giving does not actually provide a tax benefit. For example, a couple giving $20,000 per year would only see $4,900 of their donation actually reduce their income taxes, if they didn’t have a mortgage and had $10,000 in state and local taxes to itemize.

If this family instead “bunched” two (or more) years of giving together into one year, perhaps using a donor advised fund, they could deduct far more, saving potentially thousands of dollars.

Donor advised funds

We hear often about the super-rich using private foundations to give to causes they support, but a similar option is available to people without billions of dollars.

Think of a donor advised fund as a charitable bank account that you can fund from various sources, from cash to real estate to stocks or mutual funds that have gone up in value, or even agricultural commodities.

Imagine you had some Cerner stock purchased for $5 in the early 2000s that is now worth over $75. If you sold the stock and donated the cash, you’d be able to deduct it, but may also pay $14 or more in capital gains taxes for each share sold. Instead, if you donated the shares to your Donor Advised Fund, you’d not only get to deduct the $75 for each share donated, but you also wouldn’t have to pay the capital gains taxes.

These types of accounts can also be great tools for the charitable bunching strategy because you don’t have to give all the money away in the same year you put it into the fund.

Qualified charitable distributions

For those over age 70½ with IRAs, the optimal way to give is often a Qualified Charitable Distribution This is a gift directly from an IRA to a charity. It is important to work with your adviser or the firm that manages the IRA to ensure this is done correctly, since the funds cannot go to your bank account first.

(RMD rules were changed by The SECURE Act. For individuals who reached the age of 70½ in 2019, the first RMD was required to start by April 1, 2020. Under the new rules, those who reach age 70½ in 2020 or later must take their first RMD by April 1 of the year after they reach age 72.)

An added benefit is that for people who have Required Minimum Distributions (RMDs), this way of giving reduces the RMD if done properly. The limit for this type of giving is $100,000 in 2021, and it is important to note that the giver must be over 70½ when the gift is made.

For large donations, there are more complex tools that can be used, such as private foundations and various types of charitable trusts. In many cases, even for affluent families, the tools listed above can help make giving both easy and tax efficient.

We encourage our clients to be thoughtful about their giving and make the process something the whole family has some involvement with, even if amounts aren’t shared.

As older generations look to leave a legacy, involving multiple generations in the giving dialogue can be a powerful experience. Many families have giving plans that empower children and even grandchildren to make decisions in what organizations to support. They report that these discussions are some of the most meaningful they have.

With the myriad of strategies and rules, it is important to consult with your fiduciary adviser or accountant prior to enacting a giving plan.

In our work with clients, we often find that the most generous people tend to also be least anxious about their finances. This isn’t just families that have more resources. Many people with far more money than they will ever spend don’t experience the financial composure and confidence that less affluent givers do.

Don’t just give for the tax benefits, but don’t ignore them either.

Jesse Bunse is a CERTIFIED FINANCIAL PLANNER professional and a member of Financial Planning Association of Greater Kansas City. He is a Senior Financial Planner for Keen Wealth Advisors in Overland Park.