By Jeremy Zoladz
‘Tis the season of giving. From red kettles to toy drives, there are reminders everywhere—the spirit is in the air. With the recent natural disasters and an increased awareness of social issues, many have been moved to possibly give even more than the record $410 billion in 2017 (according to Giving USA). Planned or unplanned, how do your clients give more tax efficiently? After all, this results in more money to go around.
Here are some examples of conversations financial advisors and wealth managers are having with clients on the topic this holiday season.
Doug De Groote, managing director at De Groote Financial Group, and a large number of the firm’s clients were directly impacted by the Camp, Hill and Woolsey fires. De Groote explains, “Being located in Westlake Village, California we saw firsthand the need for giving, of both time and money, and people really stepped up.” When speaking with clients on the topic, De Groote’s discussions ranged from giving strategies to the identification of appropriate charitable organizations. “Clients were interested in supporting both large national organizations, such as the Red Cross, and smaller local entities, like the Ventura County Community Foundation. We would also review their aggregate gifts for the year, which is especially important considering recent tax reform.”
The 2018 standard deduction amount has nearly doubled and been a catalyst to determine if it makes sense to “bunch” contributions for tax purposes. “Bunching” essentially moves charitable contributions to specific years, while limiting donations in other years. When individual taxpayers contribute by bunching donations, they combine multiple years of “normal” annual charitable contributions into a single year. In the bunch years, the relatively large charitable contributions will increase the likelihood of exceeding the standard deduction and thus provide taxpayers with additional tax savings.
Following the tragic shooting in Pittsburgh, Gary Hirschberg, founder and CEO of Aaron Wealth Advisors, found himself having similar conversations with clients. Gary is a board member of the Hebrew Immigrant Aid Society and head of its investment committee. “HIAS is the preeminent secular refugee organization in the United States—it is based in Jewish values and history, but continually strives to help the most vulnerable of our fellow human beings regardless of their faith or background. The everyday importance of this work was brought into even greater focus because a man took the lives of innocent people while blaming HIAS and its mission,” he says.
Gary coupled the bunching strategy with the use of a donor advised fund, which would allow individuals to realize the potential current year tax deduction but actually give those monies to charities in following years. “We have also established our own corporate philanthropy fund to afford employees the opportunity to support organizations of their choosing and potentially provide matching gifts on behalf of clients.”
If your client is aged 70½ or older, Internal Revenue Service rules require them to take required minimum distributions each year from their tax-deferred retirement accounts. This additional taxable income may push them into a higher tax bracket, subject them to the Medicare surtax and potentially reduce their eligibility for certain tax credits and deductions.
Jim Maher, CEO of Archford Capital Strategies, talks with charitably inclined clients about eliminating or reducing the impact of RMDs by considering making a qualified charitable distribution.
Maher explains, “A QCD is a direct transfer of funds from an IRA custodian, payable to a qualified charity. Amounts distributed as a QCD can be counted toward satisfying your RMD for the year, up to $100,000, and can also be excluded from your taxable income.”
This is not the case with a regular withdrawal from an IRA even if your client uses the money to make a charitable contribution later on. In this scenario, the funds would be counted as taxable income even if your client later offsets that income with the charitable contribution deduction.
“A QCD is just one strategy though; you have to look at the context of the entire client situation and their respective goals. We enjoy those conversations and often they have led to Archford working closely with the St. Louis Community Foundation to establish a donor advised fund on the client’s behalf,” states Maher.
So, whether moved by the holiday spirit, recent disasters, a long-term philanthropic plan or something in between, a charitable giving review is prudent for many clients this time of year. They just might find a little gift from Uncle Sam to pass on.
Jeremy Zoladz, CRPS, is Senior Vice President Relationship Management at Dynasty Financial Partners in Chicago.
