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  • Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Smart Charitable Giving | 3 Pro Tips!

Smart Charitable Giving is relevant during this time of year. In this video, we talk about how to give money and save on taxes. Give more money in donations and pay less in tax; we love this formula. Be smart about your charity.

If you're smart about charitable giving, you'll think before you give gifts of cash. We've got three tips that you should be aware of before you make any gifts of cash to charities. The tax savings could be huge.

By the end of this episode, you’ll learn the three places to give money for and get a great tax benefit and how you can apply those in your life.

00:00 Welcome!

01:12 Intro

01:55 Tip 1

03:13 Example 1

08:22 Tip 2

10:03 Tip 3

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John: As we approach the end of the year, many of us start thinking about charitable things. Toy drives, providing holiday meals for people in need, but one thing is, before we give gifts of cash, there’re three things we want to talk about and share with you that can help you save money on your taxes. One that everybody should be aware of before they make any gifts of cash to charities.

And then there’re two special circumstances that if you fit those circumstances, taking advantage of these strategies can really mean huge tax savings for you. So by the end of this episode, you’re going to learn three places to be aware of saving taxes and how you can apply those in your life. Hi, I’m John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I’m Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois. And John, before we proceed with tax tips and charitable giving, let’s ask everybody to subscribe. It helps our channel and helps us reach more people and gives us credibility with the people at YouTube. So let’s get right into this. Tell us your first tip about what people need to be mindful of when giving money away.

John: Yeah, I love this topic, especially as we approach the holiday season. For me, it’s always the holidays when I do my personal giving in dollars, because it’s the end of the year, and I’m feeling appreciative and grateful, that sort of thing. Maybe it’s Thanksgiving being the holiday it is and things. I know a lot of folks donate at the end of the year, and I think you might have mentioned something like a third of donations to charity come at the end of the year. Some big number. And so, as we’re doing this, we’re sort of getting in gear and thinking about this. There’s one, I was going to call it a mistake, but I’m not sure that that’s the right term, but there’s one place where people are wasting tax dollars.

They’re wasting opportunities that we see all the time in our office and it’s across the board, whatever stage of life people are. And what that is, is somebody that writes checks to charities out of their checking account and donates to their church or to United Way or to Red Cross or whatever your charity is. And at the same time, they’ve got investments that are not in IRAs, like in a brokerage account that have gone up in value. So you go, “Wait a minute, what do those two things have to do with each other? I’m writing a check, I’ve got money, I want to support these causes. And yeah, I’ve got investments, but who cares?”

Well, here’s the thing about that is in addition to writing a check to a charity, one of the options that we have is to give stock or give mutual funds to a charity. So why would we want to do that if we’re going to give the same amount? Well, maybe I’ll just start with an example here. When you give money to a charity, remember, charities are tax free organizations. So when they sell investments, they don’t pay any taxes on those. We’re not tax-free organizations. If we sell investments that have gone up, we have to pay taxes on the gains. And if it’s okay, I’m going to jump in with a brief example. I have a friend who inherited some money from his mom; his mom passed away, and he inherited some funds.

We’re sort of chitchatting on things, and he said, “Well, listen, I’ve got a bunch of individual stocks. I would like to be more diversified, so I would like to sell these.” And for various reasons, there was a low basis, they call it, meaning what mom had invested in the money, I think it was Hershey stock. Actually, mom had invested like $10,000 in Hershey stock and now it was worth $25,000. And because of the circumstances of mom’s estate, if my buddy sold it, he’d pay taxes on that $15,000 in gain. So we’re talking $2,000, $3,000, $4,000 in taxes. And so, I said, “Well, listen, I don’t know if you want to give $25,000 to charity, but if you did, you could give that money to charity.”

The charity sells that, they pay zero in taxes on it. You get the tax deduction for the full $25,000. The charity gets the $25,000 to spend on their causes. And there’s no taxes being paid anywhere along that line.” As opposed to my buddies selling that investment, paying taxes, and now maybe only having $20,000 to give to charity, and he’s got less of a deduction. So by giving the stock, we avoid the capital gains on that. And he said, “Whoa!

Yeah, I’ve been meaning to do something good with this money. I need to think about that.”

And again, is he going to do all $25,000? I don’t know about that, but the idea that if it’s $5,000, or some smaller number, he can save money and avoid those gains. So whether it’s something that we’ve invested in and it’s gone up or in certain circumstances and inheritance that we have to pay taxes on, it can be a really great tool to at least be aware of. If I’m writing a check, I should be thinking, “Do I have investments that have gone up that I can replace that with?”

Bridget: So there’s a lot to unpack there. First, thanks so much for this example. It’s great. There’re a few things that I would say on your example. First of all, in the vast majority of the situations when people inherit money in a stock, they end up getting what’s called the step up in basis. And so, the basis is whatever they got it for, like on the day that the person died in the usual situation. Okay. So I just don't want to make I want to make sure that people understand that.

John: Yeah, it’s not every inheritance. This is a unique circumstance.

Bridget: Right. There’s plenty of times that people have stock that has gone up in value. So maybe you got Hershey stock when you were a kid, you kept it, and now you’re 70 and you say, “What do I do? I have this Hershey stock.” And one point is that you don't have to give it all. You can give two shares if that’s what you want. It’s not an all or nothing situation. The other thing is as a tax preparer—I started doing taxes 25 years ago—and believe it or not, a lot of people don’t know how much they bought stocks for, so they have no idea. And then for something like a mutual fund, the companies change five times.

Maybe it’s a place that someone used to work for, but that has long since changed, but now they’ve got some miscellaneous stock, and they have no idea what the basis is. You have the sales price minus the basis, which is how much you have to pay capital gains on. And so, people are just clueless about it, and it’s very difficult to figure out. So those stocks are great candidates for just giving those away. And if you’re going to give money away anyway, if you’re of that ilk, and I think a lot of people are, then you might as well do it in the most tax efficient way possible. If you want to give money to the IRS, you can.

John: That’s right.

Bridget: You can donate to the IRS; that’s another topic. And if you’re interested in that, put a comment and we’ll do a whole show.

John: We’ll work on that. That’s right 😊

Bridget: But if you’re not interested in donating to the government, you can do it in this more efficient way.

John: Those are some great details on that, Bridget, and it’s a nuance like so much of what we do. We can’t address every situation, but clearly those things you brought up are awesome. The one takeaway from this after this discussion is, if you have investments where you’d have to pay taxes on the gains, think about giving that away. It’s a trigger for your end of things to say, “I should think about this.” The other thing I want to point out is if you didn’t catch it, is that Bridget started doing taxes over 25 years ago. Since she was in her early teens, she’s been doing taxes, so she’s an expert on these things. I couldn’t let that one slip fast.

So if you have stock, if you have investments that have gone up, ask yourself, “Should I be giving those?” That’s the question to be asking. And that’s for everybody. There’s a couple of specific situations also that can make some sense, and I want to make sure to bring them up. For somebody that’s approaching retirement, meaning, in the next year, two years, three years, we’re going to stop working, and we expect that our income is going to go down from a tax standpoint. Maybe we’re in the 24% bracket today, and at least for a few years in retirement, we plan to be in the 12% bracket. That can be a place where you say, “Well, jeez, I’m going to give a certain amount this year and next year and those first three years of retirement.”

And maybe I look at saying, “Well, gee, should I give five years of donations to my church or to my favorite charities and do them today because I’ve got a higher tax benefit, and tomorrow I might not have such a high tax bracket” Try to take advantage of that, grouping them into one year. And there’s a lot to dig into with this, too, but just the idea that if you think you’re going to be in a lower tax bracket in the next couple of years, primarily because of retirement is where we see it. that can be a flag, that can be a trigger to say, “You know what? I should think about maybe front loading some of those donations.”

Bridget: Absolutely. And I just want to mention again, if people are interested in what I’m saying, give us a comment. Another way to do this in a more fancy-pants manner is what’s called a donor advised fund. And again, that’s a whole other topic, whole other show, but that builds on what John said. And if you want us to talk about it, we’re happy to talk about it, but we don’t want to bore people.

John: Yeah, that’s right. So that’s one of those things that we can give you some flexibility. So if your income is going to change, your income is going to go down, this is a time to think about doing some tax planning. The other place, sort of age related, or time related thing is people that are 70 and a half or over have an opportunity to make a donation to charity directly from their IRA and avoid any taxes at all on these distributions from your IRA. And again, it’s a trigger. Hey, I want to give money to charity. If I’m 70 and a half or over, I need to take a look at this qualified charitable distribution strategy and see if it makes sense for me to give money from my IRA right to the charities and avoid taxes.

Bridget: Absolutely. And we’ve done a whole show on this and I’m going to link to that in the comments. So, John, this seems like a great place to wrap it up. We hope you appreciate your details on this to help people get benefits and also to save money on taxes too. I’m Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois.

John: And I’m John Scherer, and I have a fee-only of financial planning practice in Middleton, Wisconsin. Both Bridget and I work with clients all across the country, so if you’re interested, or you have some questions on some of these strategies to see if they make sense, please reach out to us. Don’t forget to hit that subscribe button to help other people find this information. And then Bridget and I are both also members of the Alliance of Comprehensive Planners. If you’re interested in more information and maybe finding a planner in your specific area that thinks in a similar fashion to the way we do, you can check out And with that, until next time.

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.

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