Some of you might be asking what does the picture have to do with the post? The answer is simple, absolutely nothing. But isn’t it a great shot? I snapped this picture a few years ago while on a family beach trip to one of our favorite spots in Pawleys Island, SC. This shot was halfway through my morning run while I tried to get my day started right with exercise and a clear mind. Since last week was spring break week it seemed only right to dream of the beach, even if we aren’t there. Also let me apologize in advance for grammar, spelling, or comma use errors. It is not a strong point for either of us, so you just might have to deal with it. Now, let’s move on to the actual intended message of today.
Giving to our local church and non-profits has always been an important cornerstone of our life. The benefit of having margin in your finances or time gives you the ability to give to others. But I truly believe that giving helps you establish margin in these areas as well. It might be hard to give to others when you feel broke in money or time, but in my experience giving with the right mindset does more for the giver than the receiver. We still prioritized giving in the early years when money was tight. It wasn’t always easy but just like saving money, giving taught us to get by on less while putting our money to work for others, when giving, and for our future selves, when saving.
With the new tax law that passed at the end of 2018, I decided to do something I had considered doing for a little while. I opened an account with Fidelity Charitable and established a Donor Advised Fund called the Ricky and Alison Elrod Foundation. It’s like a brokerage investment account, however, once you donate money into it, you automatically get the tax deduction at that time, and then you donate the money to charity as you like. You cannot take it out, or give it back to yourself, you can only give it to 501C3’s. The Donor Advised Fund has stock investments and bond investments inside the fund and continues to grow, or shrink based on what is happening in the stock or bond market.
The truly amazing thing is that you can donate stock or mutual funds as they stand without paying capital gains on the growth. With the tax laws that passed a few years ago, some people are trying to lump deductions into one year to itemize one year and take the standard deduction the next year, which is exactly what we plan to do.
Here is an example of what it might look like to lump deductions as I did for the last several years.
So here is what I did in 2018. In 2018 we donated to church just like normal. But towards the end of the year, we moved a chunk of a mutual fund into this DAF equal to what we will give/tithe next year. The mutual fund had about $3000 of gains on it which I got to avoid paying tax on. In addition, I got to take the tax deduction this year (so it looks like I tithed more like 20+%) and during 2018 I will donate to charity from my DAF. Come tax time I will take the standard deduction. If I didn’t do this I would be close to the standard deduction every time and hardly ever trigger it. This will save me about $1900 in taxes every two years just on my income taxes… not even taking into account $450 capital gains and about $390 in GA taxes. I’ll just move my normal monthly tithe into an investment account for the time being and slowly by the end of 12 months have made my investment account whole again. Come 2019, I gave/tithe and contribute to the DAF, or I could have just done a double contribution to the DAF and itemized.
But even if I didn’t want to “Lump Deductions”, this strategy is still a very efficient way to give money to charities and non-profits. This can be very helpful if you have large gains in a taxable/brokerage account and it can also be very efficient for people with stock options at their job. Maybe you have gotten to the point where you have too much in company stock – this can be a great way to reduce that, save tax money, give to charity but not be forced to give it all to a charity at one time.
Giving has always been a big part of our life and I truly believe that the spirit of your heart needs to be in the right place when you give. But this doesn’t mean you can’t be tax-smart while you do it. Taxes are a drag on your wealth journey, so any chance you get to cut out taxes, it’s a worthwhile journey.
As your wealth grows and more specifically your taxable account grows, this becomes a very tax-efficient way to give money to your church or other nonprofits.
Alison’s Thoughts:
First, I want to say I am so thankful that Ricky takes care of so much of this type of stuff. I wanted to just make a quick note and water this post down to the most basic level. I can understand most if not all of the words Ricky used, but when you put them all together it honestly confused me. So, I am going to look like an idiot and explain the same thing above but without the proper terminology. Here we go…
We opened a giving fund (DAF). We give to our church and to other Non Profits on a monthly basis. This fund allows us to take money from our regular investments that have earned gains, and we transfer the money into the DAF. So, we don’t have to pay capital gains tax on that. Since we are giving to charity anyway, we are giving from our investment gains instead of our salary. It gives us a tax break, and the money in the fund isn’t just a savings account that makes .002% interest, it is an investment account too. And of course, having a Ricky and Alison Foundation is so funny to me. I feel like we should be going to Gala’s and Fundraisers every weekend. So, that is Donor Advised Fund in a nutshell. You are Welcome.
It’s Ricky again, now you see why it’s so important for Alison to be involved in this blog. She is much better at explaining some of these things. Enjoy your tax-efficient charitable giving.
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