To maximize the impact of giving to charity, it is important to understand the tax environment and develop strategies that will benefit the causes you support while ensuring that you are getting the most out of your money. How does current U.S. tax law affect charitable giving? What do these guidelines mean for nonprofits and donors? How could these laws change in the next few years?
SSIR editor Michael Gordon Voss will answer these and other questions in an interview with Mike Townsend, Managing Director for Legislation and Regulation at Charles Schwab and Company, and Hayden Adams, Director for Tax and Financial Planning at the Schwab Center for Financial Research, investigate. .
(Scroll down the page for a full transcript of the discussion.)
After listening:
- Download the Schwab Charitable Giving Guide to learn how to maximize your charitable giving.
- Learn how to use the Schwab Charitable Endorsed Fund with donation recommendations to expand your generosity beyond the United States and make a difference almost everywhere in the world.
- Discover how you can do even more for charity by using valued real assets held for more than a year, such as listed stocks, real estate, or personal business interests.
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MICHAEL GORDON VOSS: Welcome to season three of Giving with Impact, an original podcast series from Stanford Social Innovation Review, developed with support from Schwab Charitable. I am your host, Michael Gordon Voss, editor of SSIR. In this series, we aim to create a collaborative space for leading voices from across the philanthropic ecosystem to have both practical and ambitious conversations on relevant topics that are at the heart of more effective philanthropy.
The vast majority of US donors donate not just to charities for a tax break, but because they really care about the work of the organizations they support and want those organizations to be successful and make a difference in affect the world. But it is also true that United States tax laws can affect the volume and types of donations that donors can make. And while the old adage about death and taxes may be true, to our knowledge only one of the two is immutable. How does current U.S. tax law affect charities? And how could these laws change in the next few years? Are there ways that donors should approach their giving strategies in order to maximize the amount of money that goes to charitable organizations? And what do these policies and strategies mean for the nonprofits that rely on that support?
To provide insight into these issues and to help donors and nonprofits think through the impact of tax policy on charity funding, we are joined today by two people who have extensive knowledge of U.S. tax policy and donor strategy.
Mike Townsend is Managing Director, Legislative and Regulatory Affairs at Charles Schwab and Company. With more than 27 years of experience in Washington, Mike Schwabs is a Washington political analyst researching legal, regulatory and policy developments to determine how they might affect individual investors, retirement plan participants and investment advisers. Mike hosts Schwab's WashingtonWise Investor Podcast and is a featured speaker at dozen of financial industry events each year. Prior to joining Schwab in 2000, Mike worked at Powell Tate, Inc., a Washington, D.C. public affairs firm, and previously worked for two US Senators from Maine.
Back on the podcast is Hayden Adams, director of tax and financial planning at the Schwab Center for Financial Research. In his role, Hayden provides analysis and insight into topics such as income tax planning, tax smart investing, asset allocation and retirement strategies for a number of Schwab clients and advisors. Hayden previously headed Schwab's tax compliance function and was Schwab's principal agent in tax matters. Prior to joining Schwab in 2015, Hayden worked for the IRS as a lead auditor for eight years.
Mike, Hayden, thank you both for joining me today to explore the current and potential tax environment here in the United States and what that means for donors and nonprofits alike. Let's begin.
Mike, I would first like to ask you how you would characterize the current tax environment from a giving perspective. Do you think current tax policies are favorable to donations or are they encouraging donors to be more generous? And if so, why do you think so?
MIKE TOWNSEND: Hey Michael, thank you very much for the opportunity to be with you today. it's nice to be here. You know, I think first of all, even before you get to the tax implications, it's a great time to donate, in part because I think there's such a great awareness of the need and the important role The nonprofits are organizations taking part during the pandemic, helping people who may have lost their jobs, and the like. So I think the environment is really good right now, just in terms of knowledge and awareness. And then, on the tax side, there is no question that 2021 will be a good year to give away. Two of the key provisions related to charitable giving in last year's CARES Act, the COVID-19 relief package approved at the end of March 2020, have been extended for 2021. Itemizer, that's $ 600 for couples. And the other is that for 2021, individual taxpayers who individually list their deductions can deduct up to 100% of their adjusted gross income for cash contributions to a public charity. This is usually capped at 60% but has been increased for 2020 and 2021 to encourage donation during the coronavirus crisis. This provision expires at the end of this year. I think these are two big charity tax incentives this year.
MICHAEL: And, Hayden, Mike was just talking about this tax environment, but anyone who's heard the podcast knows that not all donations are created equal.
Aside from valued material assets that we have discussed many times, what should donors consider to maximize the value of their donations?
HAYDEN ADAMS: Well, first of all, thank you very much for having me on your show again. As you mentioned before, giving away cherished assets is probably one of the most tax efficient ways to donate, but there are many other ways to donate. For example, we often talk about focused gift giving, or many people call it bundling your gifts. With this methodology, you take the standard deduction, one year, and then focus your gifts on another year so you can qualify for the single deduction, since the single deduction is pretty high now, a lot of people are not able to, like in that Break down the past. So the idea behind it is that you basically alternate between the concentration of these gifts, the individual print and then the standard print in the next year. There are many benefits to this if you use this method correctly.
The next method I recommend to many retired people is by making qualified donations to charity; we call them QCDs. Basically, you're giving a gift, straight from your retirement account, straight to a charity. This is a very effective method as you do not have to include that money in your income when giving this type of gift with the QCD.
Finally, all you can do is give cash, write a check, or donate with your credit card.
In addition to the way you donate, there are now several tools and methods you can use when donating. You can donate directly to this charity again. You can use a donation fund to make your donations so you can give the gift to the donor fund, receive your deduction and cash out that money, or you can even use your own private foundation.
MICHAEL: So Hayden, Mike mentioned a few moments ago some of the specific provisions of the CARES Act that are going on. Are there any additional considerations for donors in this regard?
HAYDEN: Yes, there definitely is when it comes to 100 percent donation deduction. It's very tempting. I mean, who doesn't want to pay zero taxes because that's basically allowed? Because when you've given enough money to meet the 100% AGI donation deduction, you're basically saying, "I'm giving enough to wipe out my Adjusted Gross Income," which means you have no taxable income, which means that You pay zero tax.
Tempting as this is, for many people it may not be the best option. And I've done some calculations and written an article about it in the past. And to sum that up, let's say you have an income of a million dollars or something like that. In this case, they delete the highest tax bracket, the 37%, the 35% and the 32%, if they make a 100% donation deduction from their adjusted gross income. However, they also pay off the lowest tax brackets, the 10%, the 12%, etc.
Well the way you get your benefit from a gift is by taking the gift amount, whichever tax bracket wipes it out, and multiplying by that tax rate. So when you wipe out all the tax brackets, it is great if you have the 37% and 32 etc the lowest tax brackets. So you are not maximizing the tax benefits of this charitable donation.
Well, what many people might consider instead of taking the deduction in a year is that you can pull the deduction over two years, thereby maximizing the tax benefit. Even if you give them that one year, just use the normal withdrawal limits. For this example, let's assume that the person's limit is 60% of their adjusted gross income. What they would then do is if they donated 100% of their money they would only take 60% of the deduction in the first year. That would potentially wipe out all the highest tax brackets for them, those 30% tax brackets. Then they carry over the rest of the donation to the next year and deduct it the following year. And again they cut the highest tax brackets and still benefit from those low taxes like the 10 and 12% tax brackets. So overall, it maximizes the deduction over that two year period, giving the person a much better tax break than sometimes taking the deduction in a year and wiping out all of your taxes completely.
Well there are some people who could benefit from using this 100% deduction and that would be … like the one that comes to mind saying you are selling a business and you need a big one Amount of realizing income, or maybe you had a huge stroke of luck in a single year like you won the lottery or something like that. Well, in that case, yes, maybe this would be a good opportunity to take advantage of the 100% charity deduction because you will likely have a lot of income one year and may not have that much income the next year. So these are the people who might want to consider that big donation draw for 2021.
MICHAEL: Yeah, and regardless of whether you take the 100% the first year or distribute it as discussed, you know, in the end it means you can end up donating more money to the charities that you have and I support think that's what we all try to achieve in the end.
Mike, let me give it back to you for a second. You know, tax policy itself may not always be constant, but the tax policy debates seem to be. What can you tell us about the proposals that are currently being discussed or examined?
MIKE: Congress is currently in the process of drafting a massive $ 3.5 trillion spending proposal that will cover many of the president's top political priorities, including climate change, health care, social programs like a free community college and universal pre-kindergarten, would include, and much more.
These expenses need to be balanced with provisions that increase revenue for the Treasury coffers, which is a fancy way of saying tax increases. Earlier this year, the president outlined four main proposals: increasing the corporate tax rate, reducing the highest income tax rate to 39.6%, taxing capital gains as ordinary income for the richest taxpayers with incomes above $ 1 million, and ending the increase in the base for inherited assets.
Just because the president proposed them doesn't mean Congress will put them into law. There is still a lot to negotiate. And of course, Congress can and will include other changes to the tax code in its final package. So we're still waiting for the exact details, but there are a number of ideas on the table.
MICHAEL: And, Mike, because you're in DC and so close to these discussions, of all of these suggestions that you think have the potential to exist and which you think have the greatest impact on charitable giving could, and why?
MIKE: Well Michael, I think the two most likely are a modest corporate tax rate hike and the return of the highest individual income tax rate to 39.6%, which was the broadest support among Democrats before 2017. And since this bill is likely to find little or no Republican support, broad Democratic support will be crucial.
What impact this will have on charitable giving is an interesting question. And I think it's the other two suggestions I mentioned that could really have an impact on giving. An increase in the capital gains tax rate could actually increase charitable donations, as donors can give away valued stocks without paying the capital gains tax that is triggered when they sell the stock and then make a cash donation. Under the Tax Act of 2013, which increased the peak value for capital gains, charitable giving rose more than 4%.
MIKE: I'll also be watching what Congress is doing about inheritance tax. The changes under consideration could discourage intergenerational wealth transfers and encourage more people to donate to charitable causes throughout their lives rather than passing that money on, and which could have significant tax implications for their heirs.
But I think it's really important to remind everyone that we don't yet know exactly what will end up in the final reckoning. I expect there will be a lot of change, a lot of negotiation and horse trading in Congress over the next few months. Some of what I have described may occur and some may not. We just have to wait and see.
MICHAEL: Hayden, I mentioned in your intro that retirement strategies are one of your areas of expertise. And Mike just mentioned that there might be changes in inheritance tax. You mentioned QCDs as a tax-deductible way to donate retirement assets to charities. Talk to us about the possibilities with which retirement savings can finance tax-optimized gifts.
HAYDEN: Yes, a QCD is that qualified charity distribution. It can be a great method of giving gifts for many retirees. So, to run a qualified charity distribution, you basically have to be over 70-1 / 2 years old and then you can donate up to $ 100,000 directly to the charity of your choice and then you never have to accept that money back into yours Income.
Well a lot of people … there has been a lot of confusion recently when it comes to QCDs because a lot of people know that the required minimum distribution rules and QCDs were very closely related, but they recently changed the rules when it comes to required minimum distributions . Well the age isn't 70-1 / 2, it's 72 for that. And so a lot of people think, 'Oh, that means I can't do a QCD until I'm 72.'
HAYDEN: That's not the case, the age for QCDs is still 70-1 / 2. So you don't have to wait until you are 72 years old to get some of these gifts.
The benefit of a QCD is that you can prevent that money from flowing into your income. If you are concerned that your RMD will be very high and you could potentially end up in a higher tax bracket, a QCD could be a good option for you to either wipe out or remove part of the RMD that you need to take with you and you have to yourself This way you don't have to worry about rising taxes. And if you don't need that money to live, maybe you have other assets, well then it can be a great option.
For example, let's say you have a person who is 72 years old and has an RMD requirement of $ 120,000. Well, maybe they don't even need the money to live. Maybe they get enough dividends and interest and have other sources of income, maybe they own a business that they still run. So you don't really want to take that $ 120,000 in income, you just don't need it. And if that person is a charity, taking advantage of this qualified nonprofit distribution is a great option for them. They can take $ 100,000 out of the RMD 120 that they are supposed to take, they can give the 100,000 directly to a charity, they are never set off against their income so all they have to do in the end is acknowledge $ 20,000 of that income. which hopefully does not push them into a higher tax bracket or the like.
Well, there are a few things people need to consider when considering a QCD. First and foremost, you need to give the gift to the charity directly. You can't take this money, distribute it to yourself first, transfer it to your bank account, and then give the gift to the charity. If you do so, you will need to recognize all of that RMD as income and, in that case, make an individual deduction.
Well, that sounds like the same thing, like there isn't much of a difference in giving the money to the charity directly from your IRA account this way. Well the problem is it can affect other things like your Medicare benefits, it can affect your social security tax. It is generally better to use the QCD than to add that RMD to your income first.
And you need to give the money directly to an operational charity. You cannot give this money to your private foundation in a QCD, and you cannot give it to a fund recommended by donors.
Well, in the end, the best method for doing this is really individual. You have to do some math to find out, “Okay, what's the best method? Should I give valued assets? Shall I run a qualified charity distribution? ”I encourage people who want to use any of these strategies to deal with a tax and a professional to help them figure out the best option for the gift in order to maximize my charity Deduction.
MICHAEL: Hayden, whether it's retirement credits or other types of donations, what, if any, do these different approaches mean for the nonprofits? Do not-for-profit executives or development officers who work for non-profit organizations need to do anything else to maximize the benefits of these various donor strategies?
HAYDEN: What I encourage nonprofits to do is work with their clients to find out what the best gift method is for that person's situation. In this way, it alleviates many of the headaches and worries that many donors might have and makes it easier for them to donate.
MICHAEL: Mike, as we graduate today, any final thoughts you would like to share with the audience?
MIKE: I think it's important to remember that you don't make all of your charitable decisions based on taxes. And I think one of the things that is going on right now is a lot of uncertainty about what tax changes might be on the table and potentially in play for 2022. So we don't know the answers to that. Still, I think you want to make your decisions without thinking carefully about what changes Congress might bring in terms of taxes and possible tax increases. I think you want to offer places that you believe will make worthy efforts and causes that are important to you, and taxes are an important aspect, but it shouldn't be the only aspect.
MICHAEL: Exactly. Listen, Mike, Hayden, thank you two for your time today. Tax policy and its impact may not always be the easiest topic to talk about, but it is certainly an incredibly important one. And I think you both did a great job making it more understandable and interesting for our audience.
Thanks for listening. We hope you enjoyed this episode. Please consider leaving us a review on Apple Podcast or your favorite listening app as it will help others discover the show.
We encourage you to listen to other episodes from this series as well as other podcasts from SSIR. This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of the topics and speakers. Important information and a transcript of this episode can be found at schwabcharitable.org/impactpodcast.
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