At ML&R Wealth Management, we know that women have unique needs related to financial planning and investing. We must overcome many hurdles as we plan for our financial success. We understand the wage gap and the investment gap that impacts women of today. In addition, we live longer, continue to deal with earning less, and tend to invest differently than men. These hurdles create a challenging financial dynamic that we are experienced in navigating for our clients. Working with our team means you are working with a wealth management firm with a deep bench of women financial advisors that are acutely aware and familiar with women’s financial planning. We help women build and maintain a financial plan along with assisting women to avoid common financial planning mistakes so that they can maximize their potential for success.
Each week during the month of March, our women financial advisors will answer questions from the women of our community in our special blog series, “A Woman’s Guide to Investing.” We want to thank all the women who sent in questions. Because of you, this unique series is possible. If you are reading this and have a question, you can submit it here. We will make sure to answer it for you!
In week three, we will answer a question on the topic of women in philanthropy, the best ways to approach fulfilling your philanthropic desires and maximizing tax benefits.
Q: “One of my financial goals is to become more philanthropic. What are the best ways to accomplish this and maximize my efforts?
The world of women in philanthropy is evolving. Women have always been big givers, but men have received most of the credit in the past. Women giving their money and time away is not a new revelation. However, for years, women did so through their husbands’ names or, in general, gave money away behind the scenes without receiving recognition.
With the rise of women in the workforce and the shifts to women controlling more wealth in this country, many women are becoming the faces of philanthropy. In recent times, the big givers we hear about in the news are women like Melinda Gates, MacKenzie Scott (formerly Bezos), Laurene Powell Jobs.
According to the Charities Aid Foundation, the overall benefit to the organizations receiving these donations is changing as well since women and men tend to approach giving money away differently.
One example of women in philanthropy giving differently than men is that women tend to research the causes and charities they support before giving away their dollars. For instance, women want to support organizations with leadership teams or structures that represent the groups they are trying to support. Another pattern is that many organizations helping women that have struggled in the past to get big dollars are now getting attention and dollars donated since more women are making significant donations. In addition, the contributions tend to repeat and become a long-term commitment, with giving occurring every year, whereas men often prefer one-off gifts. While women have the potential to change the philanthropic landscape, like all donors, they need good information to maximize their efforts and money.
Rather than just writing checks to their favorite charities each year, women are gaining more sophistication by understanding any changes to the tax code and having clear, long-term philanthropic goals. By doing this analysis upfront, women can positively impact their own bottom lines as well as charities they support.
Donating Cash Directly to Charity
Before the Tax Cuts and Jobs Act passed in December 2017, a more significant portion (around 30%) of the population itemized their deductions rather than taking the standard deduction. In addition, since charitable donations are an itemized item, more folks were able to tap into this tax benefit. However, since the Tax Cuts and Jobs Act became law, it is now estimated that only around 10% of the population will itemize versus taking the standard deduction. The reason for this is twofold. First, the standard deduction amount is much higher now. Second, miscellaneous itemized deductions were removed. There have been caps for certain itemized deductions like state, local, real estate, and property taxes, making it more difficult to itemize versus taking the standard deduction.
What is a woman to do if they want to maintain the tax benefit of charitable donations but may not be able to itemize? If you donate a specific dollar amount or percentage of your income every year, you could bunch multiple years together into one instead of spreading them out. This will bump up the dollar amount to itemize in any given year, which may push you over the standard deduction threshold.
Example: A married couple files jointly and typically makes a $10,000 charitable donation every year. On top of that, they have another $15,900 of itemized deductions. The donation and deduction total up to a $25,900 itemized deduction which is the same as the standard deduction for 2022. There will not be a taxable benefit of donating since the standard deduction happened regardless of the charitable donation. BUT, if they combine two years’ worth of contributions ($20,000 for 2022 and 2023) and bunched them into a combined donation in 2022, they will accumulate a larger itemized deduction of $35,900. This pushes them far above the $25,900 standard deduction for 2022. Then in 2023, they would take the standard deduction.
Donating Non-Cash Assets
Suppose you are a charitably minded investor who has some highly appreciated stock. In that case, there are opportunities to donate the stock (or other assets like it) directly to the charity and avoid paying capital gains tax.
Example: A woman purchased stock 15 years ago for $10,000 (the cost basis). It is now worth $100,000. She decides she wants to donate this stock to a charity. If she sold it and then donated it, she would be taxed on the appreciation at the capital gains tax rate and only be able to donate the net amount. However, by donating the stock directly, the charity would receive the total value of the assets ($100,000), and she would avoid paying the capital gains tax on the appreciation. In addition, she gets the FULL $100,000 deduction, whereas if she sold it first and then gave cash, the deduction would be equal to the net amount after taxes are paid. This is a win-win for both the charitably inclined investor and the charity.
Taking Advantage of Qualified Charitable Distributions (QCDs) from an IRA
Qualified Charitable Distributions are withdrawals from an IRA made directly to an eligible charity. The beauty of them is that any amount of a QCD (up to $100,000) made in any given year can count toward your RMD for that year and isn’t included in your taxable income. So if you do not need the entire RMD from your IRA, this might be a great option if you aren’t able to itemize your taxes due to the higher standard deduction.
One caveat to QCDs; now that you can continue to make contributions to your IRA after age 70.5 if you decide to make a QCD in the same year that you make a pre-tax contribution, the contribution amount reduces the allowable QCD by the same amount.
Example: A 71-year-old woman contributes $10,000 to a traditional IRA and donates $15,000 to a charity through a QCD. Because of the contribution, $10,000 of that QCD will be disallowed and counted as a regular distribution and taxable income. So only $5,000 would end up counting as a QCD.
For a QCD to work correctly, the funds must be transferred directly from the IRA custodian to the eligible charity. The maximum amount that a person can donate is $100,000. That means a married couple could contribute $100,000 from their respective IRAs if they desire.
Set Up a Donor Advised Fund
A Donor Advised Fund (DAF) is like an investment account for the sole purpose of supporting charitable organizations you care about. They are generally an easy, cost-effective, and convenient way to get an upfront tax deduction. You can contribute cash, invested securities, or other assets to the fund. Then, over time, you can “advise” the fund to disburse assets to your designated charities. Choosing to give back this way can lead to a more significant impact on the charity since the investments have the opportunity to grow over time.
DAFs are very easy to set up and have much flexibility. You can open a DAF at most custodians like Schwab or Fidelity, and you can contribute to them as frequently as you like. In addition, you have the flexibility to give to any qualified charity over time. Whenever a deposit is made into the account, the donor receives an immediate tax deduction without the pressure of selecting the charity right away.
Along with the upfront tax deduction from your contribution, there are additional estate planning benefits. Any assets contributed to a DAF leave the donor’s estate. This can help tremendously with overall estate planning and fulfilling one’s charitable planning goals.
Create a Charitable Lead Trust
A charitable lead trust may be a good solution for those who have philanthropic passions, are close to or beyond the lifetime exemption amount for the estate tax to kick in, and still wish to give money to their heirs. A charitable lead trust (CLT) is an irrevocable trust designed to provide financial support to one or more charities for some time. Once the term ends, the remaining assets eventually go to family members or other beneficiaries.
You can fund these trusts during your lifetime, or they can be created at death upon the direction of a will. Upon creation, the trust will make payments to a charity on a fixed schedule for the trust term. Charity payments can be set up as a fixed annuity payment or a trust percentage. What may be surprising to some is that there is not a required minimum or maximum payment each year to charities as long as they are made at least annually.
Create a Charitable Remainder Trust
The opposite of a charitable lead trust is a charitable remainder trust. As the name implies, after the trust is funded, income is dispersed to named trust beneficiaries for a specified period, then the balance—the remainder—is donated to a designated charity. Establishing a charitable remainder trust is an effective way to reduce taxable assets in your estate, generate income for a term of years or for life, and donate the remaining assets to a selected charity at the end of the trust term.
There are two main types of CRTs:
- Charitable Remainder Annuity Trusts (CRATs) distribute a fixed annuity each year. They do not allow for additional contributions after establishment.
- Charitable Remainder Unitrusts (CRUTs) distribute a fixed annual percentage based on the balance of the trust. They do allow for additional contributions after establishment.
With more women taking the stage to fulfill philanthropic desires, knowing how to maximize your efforts so that the charities and you benefit to a greater degree is an essential first step to putting a plan in place for your charitable giving strategy. While anyone can give back, your overall financial plan may benefit from being more strategic about how you donate. At ML&R Wealth Management, we can help you explore your options to maximize your philanthropic desires and be true to your overall financial plan.