Tag Archives: Tax planning

Giving Thanks By Giving Back: Integrating Charitable Giving into Your Financial Plan

by Maureen Demers on

As the season of gratitude approaches, many of us reflect on the blessings we’ve received throughout the year. It’s a time to appreciate what we have and consider how we can share our good fortune with others. Integrating charitable giving into your financial plan is not only a meaningful way to support causes close to your heart but can also provide significant tax advantages. By thoughtfully incorporating philanthropy into your financial strategy, you can make a lasting impact while also advancing your personal financial goals. 

The Benefits of Charitable Giving

Charitable giving offers a multitude of benefits (1) beyond the immediate satisfaction of contributing to a worthy cause: 

Supporting Important Causes: Your donations can make a real difference in areas you’re passionate about, whether that’s education, healthcare, environmental conservation, or social justice. 

Tax Advantages: Donations to qualified charitable organizations can reduce your taxable income, potentially lowering your tax liability. This means more of your money goes toward making a difference rather than to taxes. 

Legacy Building: Philanthropy allows you to establish a legacy that reflects your values. It can also serve as a powerful example for your family and community, encouraging others to give back. 

Financial Planning Alignment: Integrating charitable giving into your financial plan can help you manage assets efficiently, especially when dealing with highly appreciated assets that might incur significant taxes if sold. 

Methods of Charitable Giving

There are various ways to incorporate philanthropy into your financial strategy. Each method offers different advantages, and the best choice depends on your personal circumstances and goals. 

Direct Donations 

  1. Cash Contributions: The simplest form of giving. You donate money directly to a charity, which can provide an immediate tax deduction up to 60% of your adjusted gross income (AGI) for the year. 

2. Appreciated Assets: Donating stocks, real estate, or other assets that have increased in value can offer additional tax benefits. You’ll avoid capital gains taxes you would owe if you sold the assets, and you can deduct the fair market value of the donation. 

Donor-Advised Funds (DAFs) 
A DAF is a charitable giving account offered by a sponsoring organization that allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. 

1. Flexibility: You can contribute assets now and decide later which charities to support. 

2. Tax Efficiency: Contributions are tax-deductible in the year they’re made, and assets in the DAF can be invested and potentially grow tax-free. 

3. Anonymity: If desired, grants can be made anonymously, providing privacy in your charitable activities. 

Charitable Trusts

1. Charitable Remainder Trusts (CRTs): You transfer assets into an irrevocable trust, and the trust provides income to you (or other beneficiaries) for a specified period or for life. After that, the remaining assets go to the designated charity. 

Benefits: Provides a potential income stream, immediate partial tax deduction, and reduction of estate taxes. 

2. Charitable Lead Trusts (CLTs): The opposite of a CRT, where the charity receives income from the trust for a set period, and the remaining assets eventually return to you or your beneficiaries. 

Benefits: Can reduce gift and estate taxes on assets passed to heirs. 

Private Foundations

Establishing a private foundation allows you to maintain control over your charitable giving, supporting causes over the long term. 

Considerations: While offering maximum control, foundations involve significant administrative responsibilities and costs. They’re typically more suitable for larger philanthropic endeavors. 

Qualified Charitable Distributions (QCDs)

For individuals aged 70½ or older, QCDs allow you to transfer up to $100,000 per year directly from your IRA to a qualified charity. 

Benefits: The distribution counts toward your required minimum distribution (RMD) but isn’t included in your taxable income, potentially lowering your tax liability. 

Strategic Planning Tips

1. Align with Your Values: Reflect on the causes that matter most to you. Your giving will be more fulfilling if it resonates with your personal beliefs and passions. 

2. Consult Professionals: Work with financial advisors or tax professionals to understand the implications of different giving strategies and to optimize your tax benefits. 

3. Involve Your Family: Charitable planning can be an opportunity to engage family members in discussions about values and legacy, fostering a culture of giving across generations. 

4. Stay Informed: Keep up to date with tax laws and regulations affecting charitable contributions to ensure your giving strategy remains effective. 

Tax Considerations

1. Documentation: Maintain records of all charitable contributions, including receipts and acknowledgment letters, to substantiate tax deductions. 

2. AGI Limitations: Be aware of the percentage limits on deductions relative to your AGI, which vary depending on the type of donation and the recipient organization. 

3. Itemizing Deductions: To benefit from charitable tax deductions, you must itemize deductions on your tax return rather than taking the standard deduction. 

Integrating charitable giving into your financial plan is a powerful way to express gratitude for your own blessings while making a positive impact on the world. By thoughtfully choosing the methods that align with your financial situation and philanthropic goals, you can maximize both the social and personal benefits of your generosity. 

As you consider your giving strategy, remember that effective philanthropy is not just about the act of giving but also about intentional planning. By giving thanks through giving back, you create a legacy of generosity that reflects your values and enriches the lives of others. 

Next Steps

If you’re interested in incorporating charitable giving into your financial plan, consider reaching out to a financial advisor or tax professional. They can provide personalized guidance tailored to your circumstances, ensuring that your generosity aligns seamlessly with your overall financial objectives. 

Embark on this rewarding journey of giving and experience the profound satisfaction that comes from making a difference—both in your life and the lives of others. 

Authored by Maureen M. Demers, CFP, EA

Sources:

https://health.clevelandclinic.org/why-giving-is-good-for-your-health

Life Insurance vs. Roth IRA for Retirement

by Maureen Demers on

Mark Fitzpatrick of MoneyGeek.com recently asked about insurance vs. Roth IRA for retirement. Here’s what I shared with Mark:

Our research indicates some consumers are considering whether to fund a Roth IRA or permanent life insurance to plan for retirement. Why might they be making this comparison?

The Roth is a retirement account specifically designed for retirement savings; alternatively, life insurance provides income to dependents in the event of your passing.

How do the contributions and contribution limits for a Roth IRA compare to premium payments for life insurance?

In this scenario, one would be comparing apples to oranges. I would encourage consumers to first determine their goals and then find the right tools to accomplish them. Both are useful in the right context, but I would not necessarily promote the use of life insurance for retirement unless there was a compelling reason.

For the typical consumer who’s not eligible for a Roth IRA, but isn’t ultra wealthy, how would you recommend they employ these products? Would you recommend one over the other or some usage of both?

Most consumers have employer-sponsored retirement plans, so if they cannot contribute to a traditional IRA or Roth, they will have some plan available to them.

You can also view the article here.

What are Capital Losses?

by Maureen Demers on

You’ve heard the term “capital losses”, but what are they and how do they impact your finances? Our infographic explains the basics.

Have more questions? Contact mdemers@demersfinancial.com

What Are Capital Gains?

by Maureen Demers on

Capital gain is the profit you make when you sell an asset. Imagine you decide to invest in the stock market. You buy some shares of a company, let’s call it ABC Inc., at $50 each. Fast forward a year. The value of those shares has gone up to $70 each! If you decide to sell those shares, you’ve made a profit of $20 per share. That profit is what we call a capital gain.

Capital gains are essentially the profits you make from selling an asset like stocks, real estate, or even art, for more than you paid for it. However, the government wants a piece of that profit. That’s where capital gains tax comes in.

The amount of tax you pay on your capital gains depends on how long you’ve held onto the asset. If you sell it within a year of buying it, it’s considered a short-term capital gain, and you’ll usually pay taxes at your regular income tax rate, which could be higher. But if you hold onto it for more than a year, it’s a long-term capital gain, and you might qualify for a lower tax rate.

Let’s go back to our ABC Inc example. If you held onto those shares for over a year before selling them, you might pay a lower tax rate on the $20 per share profit compared to if you sold them within a year.

Tax laws can vary depending on where you live and your individual financial situation. It’s always a good idea to consult with a tax professional to understand how capital gains taxes apply to you.

Overall, capital gains are a way to make money from your investments, and understanding how they work can help you make smarter financial decisions.

Consider Roth Conversions

by Maureen Demers on

The SECURE Act significantly reduced the benefits of an inherited traditional or Roth IRA, by requiring the non-qualified heir (typically anyone other than the spouse) to take the full amount out of the account within ten years of receipt.  Interestingly, that provision makes it somewhat more beneficial for some people to make Roth conversions today.

Chances are you know the difference between a traditional IRA and a Roth; the gist of it is that contributions to a traditional IRA are tax-exempt, but when the money is taken out of a traditional IRA in retirement, it is taxed at the retiree’s current tax rate.  In contrast, contributions to a Roth are not tax-exempt, but the money comes out tax-free.  If you convert from traditional to Roth, then you have to pay ordinary income taxes on the money that is shifted over at ordinary income rates, as the price for getting tax-free distributions in the future.

In general, you don’t want to convert assets from a traditional IRA to a Roth IRA unless you can pay those taxes with outside funds; otherwise you’re reducing the money that can accrue tax-free until the money is needed.  The traditional calculation is that the conversion only makes sense if the person’s tax rate today is lower than the future tax rate—and if you have a crystal ball which tells you what future tax rates will be, we would like to have a conversation about it.  But some bets are better than others.  The years between when a person leaves work and age 72 (when that person has to take required minimum distributions out of the traditional IRA) can be ideal for a conversion.  The tax rate during those years when no employment income is earned can be low, and partial conversions up to certain tax brackets can be very attractive.  This reduces the required minimum distributions (RMDs)

So what’s the additional argument for a Roth conversion post-SECURE Act?  Some people don’t need their IRA assets to pay for retirement.  So they take the lowest amount possible—the RMD—out each year, maintaining a balance, which they will leave to their heirs.  The additional benefits accrue to the heirs, particularly if the heirs would inherit the account during their peak earning years.

Under SECURE, 1f the Roth IRA account is inherited, it still has to be liquidated within ten years of receipt—just like the traditional IRA.  But the Roth beneficiaries face a simpler set of choices regarding the payment of taxes.  If they inherit a traditional IRA, they have to decide whether to take the money out all at once at the end of 10 years, and risk having a huge tax bill because the distribution puts them in the highest tax bracket, or take the money out gradually and forego years of tax-free compounding.  If the new owners of the account is in their prime earning years, then they may already be in a high tax bracket and be pushed higher no matter what they do.  A big part of the bequest would be lost to taxes. 

The Roth IRA beneficiary, meanwhile, has the luxury of allowing the full 10 years of compounding to proceed without any tax consequences to worry about.  He or she is never pushed into a higher bracket during peak earning years.  A Roth conversion by the parents is thus a way to transfer more assets to the heirs.

Everybody considering a Roth conversion should talk with a professional to get a full analysis of the potential benefits and drawbacks—understanding, of course, that this analysis requires modeling the unknown future tax code and income levels of potential heirs.  Paying taxes now for benefits in the future could be a great strategy under a variety of circumstances which are, alas, still essentially unknowable.