At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com.

Hey Hill, I want to make a significant gift to charity. Is there anything I should think about?

So you’ve decided to make a significant gift to charity. Your generosity should be rewarded with smart planning! When we think of donating to charity, we usually think about writing a check from our bank accounts. But that is not always the most efficient strategy.

Here are a few different ways to give to charity to make sure you’re taking advantage of all the tax benefits available to you:

1.   Donate shares of existing stocks, ETFs, or mutual funds.

If you purchased a stock, ETF, or mutual fund that has significantly increased in value, and if you ever sold the position, you’d have a potentially large capital gains tax to pay. Alternatively, a great way to eliminate the tax liability is to donate the position to an official 501(c)(3) registered charity. The full current market value of the position on the day you donate the position is allowable as a charitable deduction if you itemize your deductions on your tax return.

Example: Historically, John and Jane give $10,000 to their local food bank annually. John bought shares of an S&P 500 ETF in 2002 for $1,000. The ETF is now worth $10,000. If John and Jane sell the ETF to make their current year gift, they would pay capital gains tax on the $9,000 gain. Instead, it would be more tax-efficient and require less out-of-pocket dollars to donate the ETF directly to the food bank. By doing so, they have accomplished their charitable goal of donating a full $10,000 and eliminated $9,000 in taxable capital gains. They would report a $10,000 charitable donation as an itemized deduction on their next tax return on Schedule A. Assuming John and Jane still wanted to own the S&P 500 ETF, once the donation is complete, they could use the cash they would have otherwise donated to repurchase new shares of the S&P 500 ETF.

2.   Donate a portion of your IRA (if you are old enough)

IRAs are great tax-deferral tools, but if you’ve ever taken any money out of your IRA, then you’ve felt the pain of reporting that distribution as ordinary income on your tax return. Beginning at age 70.5, the IRS allows qualifying individuals to send funds directly from their Traditional IRA to any registered 501(c)(3) charity of their choice without having to report the distribution as income on their tax return. 

Once an investor begins taking their required minimum distributions (RMDs) (which begin at age 73 or 75 for most), this strategy becomes even more effective and is referred to as a qualified charitable distribution, or QCD. The maximum QCD a taxpayer can donate from their IRA in 2024 is $105,000 (or $210,000 per couple).

Example: John just turned 73 this year and must take a minimum distribution of $50,000 from his IRA account. John also gives $15,000 to his alma mater each year to support their basketball program. Without any planning, John will be required to report $50,000 of additional income on his next tax return…his RMD. Instead, John donates $15,000 of his RMD directly to his alma mater. John will now only be required to report $35,000 ($50,000 – $15,000) of income on his tax return. Although John will not be allowed to report the donation as an itemized deduction, the donation will reduce his ordinary income dollar for dollar.

Q. What if I’m between 70.5 and 73 (and have not started taking my RMDs yet) – does a QCD still make sense for me?

It might! Take the following example:

Let’s revisit John and Jane from our first example. They give $10,000 to their food bank each year. John and Jane also have a fully paid-off home and, therefore, have no deductible mortgage interest. They also live in a state with low property taxes and only pay $5,000 in property taxes each year. In 2024, the standard deduction is $29,200 for a married couple. If John and Jane used cash or ETFs to satisfy their charitable goals, they wouldn’t receive any tax benefit because their total itemized deductions would only add up to $15,000, so they would receive the standard deduction of $29,200, regardless of their charitable donation. In this specific case, we might recommend making the donation from John or Jane’s IRA account. Why? Doing this would reduce the overall balance of their IRA, making the future required minimum distributions slightly lower. The benefit is admittedly very minor, but it is better than receiving no tax benefit at all!

3.   Open and fund a Donor Advised Fund at Hill

A donor-advised fund (or DAF) is a designated charitable investment account that is also considered a qualified 501(c)(3) charity. The account can receive donations of cash, stock, ETFs, or mutual funds. The donations can be pooled together and invested in the account until you recommend sending funds to any other qualified charity.

Example: John and Jane open a donor-advised fund and name it the “John and Jane Smith Charitable Fund”. They fund the DAF with $100,000 of highly appreciated Apple stock. They receive a $100,000 charitable deduction on the current year’s tax return. The Apple stock is sold within the DAF account and no taxes are realized (as the DAF is considered a qualified charity). The proceeds are reinvested in a diversified, balanced 60% stock / 40% bond portfolio.

John and Jane are unsure exactly which charities they want the funds to go to, so the account remains untouched for a year. A year later, John and Jane decide to send $5,000 from their DAF to the Salvation Army. While they will not receive a tax deduction for this $5,000 donation since they already received the tax deduction benefit for the original $100,000 donation. Further, John and Jane can name their two children as successor advisors to the DAF. In the event of their passing, John and Jane’s children would then decide which charities to disburse funds to.

A great way to utilize a donor-advised fund is to “bunch” deductions together in one year. If you give $10,000 to charity each year, there’s a good chance you aren’t surpassing your standard deduction. An alternative would be to bunch five years of donations together ($50,000) and make one large contribution to your DAF. This way, you’ll get a meaningful charitable deduction in the first year and still disburse $10,000 to your favorite charity for the next five years.

As you can see, when you’re trying to do a good deed, there are many options and considerations when making a charitable donation. If you’re considering a donation of any size, contact your Hill advisor to discuss the optimal strategy for your unique situation.

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training.  This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Consult with a qualified financial adviser before implementing any investment or financial planning strategy.

Happy tax season! I realize that’s probably an oxymoron for most people, but I have a confession: I like it. Suppose you’re obsessed with numbers and details like me. In that case, digging through diligent records in your file cabinet at home, ticking and tying every dollar of income, dividends, and interest, and accounting for every possible deduction is not a bad day, in my opinion (and it just might be how I spent my Sunday afternoon this weekend. There’s no more football, what else am I supposed to do?). And when the amount due matches precisely what you had calculated six months earlier… boy, does that feel good.

I know I’ve lost most people by now, but to anyone who has read this far, I reward you with some last-minute reminders as you gather up your tax documents to send to your CPAs (or for the brave, as you fire up your preferred tax preparation software and do it yourself!).

1. You probably hear this every year, but there is still time to make a 2023 contribution to an IRA or Roth IRA! You have until the date that you file your 2023 taxes to contribute. We generally prefer the Roth IRA if you’re below the gross income limits for 2023 (single filers: $138,000 / joint filers: $218,000). If you’re above the income limits, you can still choose to make a Backdoor Roth contribution. This would involve making a nondeductible 2023 IRA contribution and then immediately converting that amount to Roth. These rules can vary from person to person, so please reach out to us if you’d like to discuss this!
2. Don’t forget about Roth IRAs for your kids! The only requirement to contribute to a Roth IRA is “earned” income. Babysitting, mowing lawns, washing cars…it all counts, even if no W-2 or 1099 is issued. There is no age limit as long as there is real earned income. I emphasize real because doing chores around the house or babysitting for siblings one night doesn’t count. As a general rule of thumb, the Roth IRA is fair game if you have your kids file a tax return for their income. Each child is limited to the higher of $6,500 or their earned income (so if they earned $1,000, the limit is $1,000). Another great benefit is that they don’t have to use their money. You can make the contribution on their behalf.
3.   If you have a high-deductible health plan with a Health Savings Account, ensure you and your employer contributions have hit the 2023 maximum ($3,850 for self-only coverage and $7,750 for family coverage). Add an extra $1,000 to that if you’re over 50. You have until your tax filing date to top off those contributions with after-tax funds.
4.  If you live in a state with no state income tax (where two of our three Hill offices reside – sorry, St. Louis), you will likely get a deduction for sales taxes you paid in 2023. You could collect every receipt and total the sales tax on every item you purchased in 2023 (and I would not judge you), or you can do what most people do and take the IRS’s estimated amount. Most people don’t realize, however, that you can also add sales tax from significant purchases on top of the estimated amount. If you bought a car, boat, or Super Bowl tickets (really anything that made you wince when you swiped the credit card), don’t forget to tell your tax preparer! Unfortunately, state and local taxes are limited to a total deduction of $10,000, so there’s a good chance your property taxes already exceed that limited amount anyway.
5.  If you have self-employment income (as reported on Schedule C), don’t forget to make a SEP-IRA contribution. The limit is based on your amount of self-employment income, but the contribution itself will also count as an “expense” against your self-employment income. Your tax preparer can tell you how much you can contribute to a SEP IRA.
6. Lastly, here’s a list of a few pesky little forms that can be missed. Don’t forget to send these to your tax preparer!

• Form 5498: If you have an IRA, you have a 5498! This is an informational form that tracks contributions and distributions from IRAs and Roth IRAs. You can file your taxes without it, but giving these to your CPA will ensure that your IRA cost basis information is kept accurate year over year, especially if you’ve ever made nondeductible (after-tax) IRA contributions.
• Form 1099-SA: If you took money out of a Health Savings Account in 2023, this form will report that amount. A copy of this is also sent to the IRS, so you might get a letter in the mail if you forget it.
• Qualified Charitable Distributions (QCD): If you sent any portion of a required minimum IRA distribution directly to a 501c(3)charity, your form 1099-R will NOT specify that. It’s the tax preparer’s responsibility to note any QCDs. If HIG facilitated a QCD for you in 2023, you have nothing to worry about. We’ll let your tax preparer know.

And if you’ve made it THIS far, I applaud you and thank you for sticking it out. I leave you with a quote:  “Of life’s two certainties, there is only one where you will be granted an extension.” –Anonymous.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, strategies, or tax advice.  Investments involve risk and, past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser or CPA before implementing any investment or tax strategy.