Charitable Giving: How To Do The Most Good

Let's talk for a few minutes about charitable giving. You know, charitable giving is awesome. There's lots of ways to do it. You can just give money away. That's okay. You're actually allowed to give $17,000 away to anybody you like without having to tell anybody about it. And your spouse can do the same. So between the two of you, if you're given to another married couple, you could give $68,000 in 2023 without having to tell anyone to give more than that. You have to file a gift tax return. And that can be a pain. It doesn't actually cost you any taxes unless you end up with a very large estate.

But it does involve filing a return, which can be a little bit of a pain.

But if you give away 68,000 at the end of the year and 68,000.

At the beginning of the year, you.

Could pretty easily double that amount. But if you want a tax break for giving money away, you can't just give it to anybody you like.

You can't give it to the kid.

Of your pastor to go to college.

That was an email I got yesterday that somebody wanted to know how best to do that. The most tax efficient way to do that.

And maybe you can give some appreciated shares to somebody in a very low tax bracket. They get your tax basis on those.

Shares, but they still might be in.

The 0% long term capital gain bracket. So maybe no one pays taxes if.

You give something like that.

But for the most part, if you want a tax break, we're talking about given to charities that have registered with the IRS. These are 501s. Okay, so if you do that and you itemize on your taxes, you don't take the standard deduction. If you itemize, you can take the amount you gave away to charity as a deduction, meaning you're basically giving with pre tax dollars. So if you're like many docs and your marginal tax rate is 30, 40 or even 50%, you can basically do, you know, an extra 50% to 100% amount of good with the dollars you give by running them through some sort of charitable organization. Obviously, if you don't itemize, you're very limited in how much of that you can deduct. They did pass a law a few years ago that does allow you to deduct something though. Let's see what the limit is for 20, 23. Okay, so it's $300 if you're single, $600 a year if you're married, filing jointly. So you can give that away without even itemizing and be able to deduct.

That on your taxes.

So obviously you got to keep records. You can't receive anything in return from the charity other than very non specific stuff. But if they give you a dinner or something, you have to subtract out.

The cost of the dinner from the amount that you can deduct.

All right, what's the best way to give? Well, there's a couple of ways that.

You ought to be thinking about. Okay.

One, if you are seventy and a half or older, I'm convinced the best way to give to charity is what's called a qualified charitable distribution. This takes the place of your required minimum distribution from your IRA or 401.

So you don't have to pull it.

Out, pay the taxes on it and then deduct it to charity and take the, or give it to charity and then take the deduction. It just goes straight from your IRA to the charity.

Right.

Nobody pays taxes on it. It's great. And lowers the amount you have to.

Take as an RMD or can be.

Your entire RMD up to $100,000 per year. Another really slick way to give to charity is to use a donor advised fund. Now some people use this to do what I call the jerk move, which is put a bunch of money into it and leave it in the donor advised fund. Because you get the deduction when you put the money in even if you don't actually give it to a charity. But when you take it out of the fund, that's when the charity actually gets the benefit.

But you don't get an additional deduction at that point.

The money can grow while it's in.

The donor advised fund.

There's usually some fees, but you can.

Invest it just like you could in.

Any other tax protected account.

Right?

It grows in a tax protected way. It's tax free growth in a donor advised fund. So you could put $100,000 in it and a couple decades away, give away $300,000 and.

None of that would be taxable income to you or the charity.

But the nice thing about a daf, couple of nice things about it, you can put the money in all at once and then distribute it to multiple charities without having to keep track of all those receipts, all the charities you gave it to, like one big receipt from the daf. That's it, that's all you have to keep track of. And so it's very easy to show.

In an audit that you, you know, legitimately deserve that deduction.

But the reason I really like it is it eliminates what I call charity porn.

Okay.

If you've given to charity, like multiple charities and put your name and address on that gift, you know what happens next. Over the next five to 10 years, your mailbox is filled with glossy brochures from whatever the charity might be, might be the greatest charity in the world, but it still probably spends 5 to 15% of its money trying to get more donations. And you can leave the money in the charity where it does more good rather than being used to market to you some more by not telling them who you are. And a donor advised fund is a.

Great way to do that. Right. You can basically give anonymously.

And so I really like that because it got rid of all that charity.

Porn out of my mailbox and I.

Feel like my dollars go a little.

Bit further when I do that.

All right. As we talked about in the podcast itself, I think it's great to give while you're still alive. You get to see the benefits of it. But lots of people prefer to do.

All or most of their giving after they die.

So what should you leave to charity? Well, there's a few types of accounts which are better than others. For example, a health savings account, an HSA is a terrible account to inherit, but it's a great account for a charity to get. If you inherit one, it's all taxable income in that year at your ordinary income tax rates. But is it taxable to the charity?

Not at all.

It's just like getting cash to them. It's all the same. Same thing with an ira. Now, the benefit of an IRA if you inherit one is you can at least stretch it out over 10 years. But the charity, they don't pay any taxes at all on that, whereas it's, you know, taxable ordinary income tax rates to your heirs. So first, the first best account to leave to a charity is an hsa. The second best account is some sort.

Of tax deferred account like an IRA or 401k.

So keep that in mind when choosing.

What to leave to who. If you have a big charitable.

Desire.

At your death, those are certainly the accounts that ought to go to the charities.

First, thanks to all of you who.

Do give to charity.

This holiday season, a lot of us.

Our minds and hearts turn to others and we realize that there are a lot of people that our dollars can help. And many of us truthfully have enough, have enough income, sometimes even have enough wealth already and we can afford to give away some money.

Give some away. If you've never tried it. See how it goes. Give to somebody you care about, give to somebody in need, Give to a charity that supports a cause that you.

Support, and you'll be surprised what it.

Does to your psyche.

I think it's not only good for your soul, I think in the long.

Run it's actually good for your finances.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.