Lower Your Tax Bill: 5 Year-End Gifting Tips

Welcome back to another episode of We're Talking Money. I'm Dustin Hocken, this is Phil Clark, and we're getting closer to the end of the year, which means we're running out of time to use those charitable gifting strategies to lower your tax bill. Today we're going to talk about five strategies that you can use before the end of the year.

Dustin, before we get started, just want to remind all of our viewers, if you haven't subscribed, take a minute and do that right now, because we're putting out new and relevant content every week helping you make better financial decisions.

Strategy number one: gifting appreciated stock. We see this a lot where people are gifting to charity, they're tithing for their church, but they're just making cash donations or cash gifts. Well, you can actually gift your appreciated securities. So what's nice about this is you'll get the full value of the security that you gift, and you don't have to sell that security and pay all those capital gains taxes. What's really nice about it as well is, as long as the charity is a 501(c)(3), when they sell the appreciated stock, they don't pay taxes on that gain. So it's a really truly win-win for everyone when you gift appreciated securities.

So the process of this, what does it look like? Well, the first step is you want to reach out to your charity or your church and see if they have a brokerage account that receives these securities. More likely than not, they will have some type of brokerage account where you can donate securities directly into the account. They'll give you an account number, may give you a routing number, they'll give you the institution where it's held, and they'll give you a DTC number. Once you have those, you reach out to your custodian or your adviser, and they'll help you transfer the stock directly into the brokerage account.

Yeah, so Dustin, when you talk about gifting highly appreciated stock, we're talking about avoiding tax in terms of capital gains, because that charity doesn't have to pay tax when they sell it, as you said. But we're also talking about being able to deduct this gift. So this is really a double benefit when it comes to tax. That's a pretty good deal. And if you need any help with this, please reach out to our team at OmniStar. We do this for a lot of clients, would be happy to guide you in the right direction.

All right, Dustin, that brings us to strategy number two. We're talking about qualified charitable donations. Now, this one's become really popular over the last few years. If you're 70 and 1/2 years old and maybe you have an RMD, a required minimum distribution, you don't have to pull that money out, pay the tax on it. What you could do is use a qualified charitable donation technique, or QCD, and up to $100,000, which is probably well above what your RMD is, but up to 100,000 can move from your custodian, where your IRA or qualified retirement plan is held, direct to that charity, and it never hits the tax return.

One more thing: you don't need to make an RMD, and if you're not at the age where RMDs are required, that's okay, you can still use this benefit. QCDs, or qualified charitable donations, allow you to give up to $100,000 per year from a qualified plan. Doesn't have to be RMD. So if you're charitably inclined, you want to make a donation this year, you're planning on doing that anyway, and you're going to pull it from your IRA, use the QCD. Saves you a lot of tax. That means you can give more to the charity.

Strategy number three: donor-advised funds, also known as a DAF. Now, these are great for numerous reasons. One, because they're fairly simple to set up. Two, they're inexpensive. And one of the biggest advantages of a donor-advised fund is when people make charitable contributions, or maybe people want to make charitable contributions but they're not quite sure where they want the money to go. Well, a DAF alleviates all this stress, because you can set up this fund and you can make contributions and receive the deduction today, and then at another time in the future you can decide exactly to which charity you would like these funds to be distributed.

And the beauty of that, Dustin, is they can make that distribution or direct the distribution whenever it may be, a year, two years, five years, but at least, like you said, they get the deduction right now.

So how do you set up a DAF? Well, first step, reach out to your custodian, and they're going to have steps for you to take in order to establish this account. OmniStar, we choose to use Fidelity, and they have a lot of great resources. So if you have questions or need information, please reach out.

Okay, that brings us to strategy number four. This is one of my favorites. It's called bunching. If you're a giver, if you enjoy giving and you know you're going to give year after year after year, and maybe you've had a great taxable income year, you got more money on the table, maybe you had a big raise, you closed a big deal, all of a sudden you're thinking, how can I get rid of some of this income or lower my tax bill? Well, deductions make that possible. But maybe you're thinking, my standard deduction, I can't get over that 27, 28,000 as a standard deduction, maybe that's the best I'm going to do.

Well, maybe not. If you're a giver, you're going to give every year anyway, Dustin. Might as well take two, three, even four years' worth of giving or more, whatever works for you. That can get you past that standardized deduction. All of a sudden you might be able to start itemizing, and you may have a lot of other things coming together to really help reduce that AGI, or adjusted gross income, and that means lower tax bill.

Keep in mind, however, if you're giving cash, you can give up to 60% of your adjusted gross income and still get all of that deduction, if you will. If you're giving appreciated securities, you're limited to 30% of your adjusted gross income. Nevertheless, great tool here. Don't forget bunching. If you're a giver, roll some of those years into this year. Can certainly help you lower that tax bracket.

That's right. Bunching is also a great strategy because you can use it with strategy number one of giving appreciated securities. So rather than just making a cash gift for one year, use the appreciated security rule and maybe give two, three, four years. Now you're really getting bang for your buck.

Lastly, strategy number five, and this is using a charitable deduction to offset the additional income from a Roth IRA conversion. We talk about it a lot: having tax diversification in retirement is so important. A lot of people will be pumping money into their 401(k) over and over and over, and they get to retirement and they have all this taxable income. Well, Roth IRA conversion can be a great tool, taking some of that money, moving into a Roth IRA, where you don't have required to distributions, where the growth is tax-free and it transfers to your beneficiary tax-free. Incredible tool.

But you may be saying, gosh, I'm not sure if I really want to make that conversion, because if I convert 50, 60, $70,000, well, all of a sudden your income goes up by 50, 60, $70,000. Well, that's where using a charitable contribution to offset the additional tax of the Roth IRA conversion can be a great tool. So look at the years that you may be making these Roth IRA conversions and try to match up your charitable giving with those years off of those taxes. Great strategy, and it'll put you in a better position long term.

But sometimes people forgo this great opportunity because they don't necessarily want to spend the money on taxes. But a lot of times we find that advisers aren't talking about using charitable contributions to help offset what is going to be a tax on that conversion. Charitable giving is a great way to satisfy the tax on the conversion, or at least some of it, and do something great for your favorite charity.

There you have it, five strategies for year-end gifting. I hope this is helpful, and I hope one or two of these strategies are relevant for you that you can incorporate before year end. Philanthropy is so important. It's one of our wealth management elements that we talk about at OmniStar, and we find that it's not talked about enough, and there are a lot of great strategies to make giving just a little bit easier.

Hey, if you're thinking about any kind of year-end strategy, especially if it comes to things like charitable giving, if you're not sure, you don't have to go it alone. You can reach out to our team here at OmniStar. We're happy to give you guidance. You don't have to be a client. If you just simply need some help making good decisions here before the year is over, reach out to us. We're happy to help. It's what our team is all about. Don't forget to like, share, subscribe, as Dustin says, all that good stuff. It helps us and it helps you. We'll see you next time on We're Talking Money.

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