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Tag: Donor-Advised Fund

Hey Hill, how can I….

Michael Kafoglis

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.

  1.   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!

  1.   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.

Effective and Efficient Charitable Giving

Numerous studies have tried to measure the psychological benefits of giving to others. Whether giving to another person or organization or helping a friend with a project, the donor’s psychological benefits are typically even more significant than the recipients. In that light, let’s discuss three of the most common ways to give money to various charitable organizations and their respective benefits.

Cash: The most common method is to write a check from one’s checking or investment account. Then, you accumulate all of your documentation of charitable giving throughout the year, and you may get a tax deduction. We say “may” because you will only receive a tax deduction for your charitable giving if all your itemized deductions exceed the standard deduction.

Qualified Charitable Distribution: Another option is to make a charitable contribution directly from your IRA. This option is only available for those over 70.5, and the maximum amount is $100k/year. There is no tax on the IRA withdrawal and no deduction on the tax return. This option is attractive for those whose standard deduction is larger than one’s total individual deductions.

Additionally, for those 72 and older, the withdrawal from their IRA will count toward their required minimum distribution for that year. Not having the full required minimum distribution amount count as income will lower one’s taxable income, which may have other benefits such as lower the Medicare surcharge on Social Security.

Donor-Advised Fund: A third option is to establish a Donor Advised Fund (DAF) and contribute taxable assets to the fund that will supply several years of future donations (we suggest 5-10 years of one’s annual contributions). We typically recommend clients contribute appreciated securities that they have held for over one year to the fund to avoid realizing the gain on the position. You will take a tax deduction within the year you fund your DAF. You can make contributions at any point in the future or bequeath the fund to specific organizations at your death. There is no additional tax deduction when you grant the money to charities, and there is no need to track the donations. Additionally, because the money inside the fund is invested, it can continue to grow and allow you to give more to charitable organizations that are important to you.

These are just three of the many ways to give to charitable organizations important to you. For more information on methods of charitable giving please reach out to us.

Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Hill Investment Group