• Bridget Sullivan Mermel CFP(R) CPA

Make More in Donations and Pay Less in Tax

Updated: Dec 18, 2021



If you want to make more in donations and pay less in tax, picking the right way to give to charity is crucial. In this video, we'll explain the four different ways most people can make donations and save on tax.


Because of a recent tax law change, many people no longer "itemize" their taxes. When you itemize, you can deduct all of your donations.


"Itemizing," for most people means that they have mortgage interest, state & property taxes and gifts to charity that combined exceed $13k if they're single, or $26k if married filing jointly.


There are still four relatively easy ways to pay less in tax when you donate, even if you're not itemizing your taxes.


1 - Giving cash: In 2021, you can deduct $300 of in gifts to charity, $600 if you're married filing jointly. Just make sure to take that on your 1040.


2 - Giving investments that have gone up: Do you have investments that have done really well over the years? Many charities are able to accept donations of stock or mutual funds; by giving stock that has gone up to the charity the giver doesn’t have to sell and pay taxes on the gain. The charity can sell the stock but doesn’t have to pay taxes on the gain as a non-profit.


3 - Giving directly from an IRA if over 70.5: If you are in your seventies, there is a good chance that you don’t itemize your deductions if you have paid off your mortgage and are no longer working.


But you can now give to charity right from your IRA. Donating from your IRA means you' won't be taxed on this distribution and gives money that you've earned, but have never been taxed on.


4 - Grouping a few years’ donations into one year. Here, you make several year's donations in one year and itemize in that year.


All of the above are solutions, but the one question that you really need to ask is when I want to donate money to charity, is there a way I can do it that is better than just writing a check?


The four options we just outlined can then be your checklist, and if any one of them apply, you’ll stop wasting money on unnecessary taxes.


TRANSCRIPT:


John: As we enter the holiday season, it's a time for giving, and a lot of people give money to charities, but knowing how to give the money to charity in the smartest fashion can save tax dollars. And that's going to be our topic on today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.


Bridget: I’m Bridget Sullivan Mermel, and I've got a fee-only planning practice in Chicago, Illinois. And before we start talking about tips on donating, John, let's have people subscribe, so that helps us with YouTube and helps us get our word out. Thank you if you've already subscribed.


Okay, so, John, let's talk about our four main tips for how the regular person, not multi-billionaire, can give money more effectively, so that they can, in effect, give more money away. Our first tip is that in 2021…even if you don't itemize, which I would say 90% of the people don't itemize on their taxes anymore, you can still deduct $300 if you're single or $600 if you're married filing jointly on your taxes if you give away those amounts of money. And that is if you give away those amounts of money in cash. It doesn't count...if you're donating stuff for 2021.


John: That's right. And that's what we're kind of talking about today is giving cash, giving money, not clothes and furniture and things. And it used to be before a couple of tax law changes recently that when you gave money to charity most people could deduct it on their taxes. Now, as you said, most people can't deduct it except for that $300 to $600 on that level. So the first thing is write a check. What most people do is write a check. So keep track of those records even if you're not itemizing because you can take a deduction for that.

But then there are some other ways that people can give the same amount to charity and have a little more bang for the buck. And one of them is if you have an investment, not in an IRA but in a brokerage account, in a regular taxable investment and that investment has gone up. You bought a mutual fund for $1,000, and now it's worth $10,000. If you give that mutual fund or that investment to charity, you don't have to pay any taxes on the gains in it. Where normally you have to pay taxes on gains, you give it to the charity, they sell it.


And because they're a nonprofit and a tax-free organization, they don't have to pay any gains on it. And so you avoid paying those taxes on gains. So one of the things is, hey, if I'm going to give money to a charity, do I have any investments that I'd otherwise have to pay taxes on? If I can look to give that money to charity that can save a significant amount in taxes more for the charity, as you said, Bridget, and a bigger tax deduction for me.


Bridget: And you need to use charities for this that are established enough. So if your local theater company might not have it set up so that they're able to accept that kind of donation, but any kind of middle or large charity will. So any kind of church should be able to accept this kind of donation, even if it's a pretty small church. Any large charity will love this, but a small startup charity that is giving to bunnies--the bunny charity might not.


John: So you have to ask, right? Ask, “Hey, I'd like to give some stock or some

mutual funds? Would I be able to donate that to you?” And just by asking that question, you can save yourself some money and you could save the charity some money as well.


Bridget: Right. And if they don't know, then just move on. It's okay.


John: That’s right.


Bridget: They probably don't do it. But it's common and charities that accept these donations will encourage it, so it's not a problem and it's not weird to ask.


John: No, absolutely not. One thing. There's one other strategy that people…that a certain group of people can take advantage of, and you don't have to ask the charity for any benefits. And that's if you're over 70 and a half, you can give money from your IRAs directly to charities, and it doesn't count as taxable, as a withdrawal for you.


And so where that can be really helpful is that, listen, when you put money into your IRA, it went in and you took a tax deduction, so that money has never been taxed, right? It grows. There's no taxes. And I said, “Listen, if I'm going to spend that, I'm going to have to pay taxes on that, but if I give it to the charity, there is no taxes on the other end. That's money that has literally never been taxed. All money that has never been taxed that goes to the charity.”

It's the equivalent of taking a deduction for it. And so again, without itemizing or having more complicated things, giving money from your IRA to charity, that can be a great way to save some tax dollars and put more money in the charity's pocket as well.


Bridget: And there's two other tips that I would suggest with that. One is that you need to get a checkbook from your IRA account. And most IRAs that I've seen lately do allow you to get a checkbook because the check has to be written directly from your IRA account to the charity. So that's the first thing.


And the second thing is that these donations count as required minimum distributions if you're over 72. So if you're over 72 and you give some money to a charity through…writing a check out of the IRA, then that counts as part of your required minimum distribution, so you can take less in your required minimum distribution if you don't need to take the total amount for your lifestyle.


John: Yeah, that's great. And then the last thing that I wanted to make sure we talk about today is even if you don't fit any of those other categories and you're just going to write a check to the charity, you might look and say, “Listen, if I always give $1,000 to this charity every year, maybe I'll give five years’ worth and group my deductions into one year so that I can take advantage of that itemizing in a year.”


And it takes a little bit more math to look at that, but you might look at grouping your deductions, grouping your donations to charity into one year, and that can be an effective way for people that on a consistent basis give to their church or specific charities. And again, if you're going to give the same amount over a period of time, but if you can take a little higher deduction for it that can be really effective.


Bridget: We're really happy to be able to offer this: four, easy, doable ways that you can give more money to charities effectively. There are more advanced ways, too. Perhaps we'll talk about those, too, but these are great for just a regular person to be tax smart and give away as much as possible.


John: The biggest, if there's one, we're big on action items, if there's one action item, sort of the big tip is, if you're going to give money to charity this year, just think about is there a way that I could give money to them and have a little bigger bang for my buck than just writing a check?


And those things that we walk through today, those are sort of a checklist of, "Oh, do I have investments that have gone up? Jeez, if I'm over 70 and a half, maybe I should look at that. Maybe if I'm not over 70 and a half, I should talk to my parents about doing that. Would it make sense for me to group my deductions and do a bunch in one year?"

That sort of checklist thing can literally save hundreds of dollars in taxes by doing the things we're going to do anyway, but just being a little more tax smart with those. So I think it's probably a great place to wrap things up here.


Bridget: Yeah. Let's wrap it up. So we're both members of ACP or the Alliance of Comprehensive Planners. You can find out more about ACP at acplanners.org. And if you like the way that John and I talk about things, there's planners all over the country, it's a non-for-profit group. We share the same values, and we generally think about things the same way.


John: That's great. And remember to hit that “subscribe” button. And until next time, Bridget.


Bridget: Thanks!


At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

12 views0 comments