Allworth Co-CEO Scott Hanson shares some ways to simultaneously save money and make a difference.
While most people I know would love a respite from the news (which has been largely sour all year), it’s hard to shut it off. Yet, even with all the uncertainty in our world, your financial situation never stands still.
I encourage you to remain proactive.
With that in mind, there are things you can do that save you money and support a cherished non-profit - which can help you feel better about the world. (And don’t we all need a little of that, right now?)
As an advisor with over 30 years of experience, I’m a big advocate of the win-win that is giving to charity while simultaneously lowering your tax burden. Not only is donating undeniably great for the recipient, studies have shown that it’s also good for your physical and emotional well-being.
Itemizing your deductions can reduce your taxable income. An itemized deduction is a donation or expenditure toward an eligible product, service, or organization that can be subtracted from your adjusted gross income (AGI) to lower your tax bill.
You should consider itemizing (claiming) your deductions when their total amount surpasses the amount of the standard IRS deduction, which, for 2020, is $12,400 for individual filers, and $24,800 for married couples filing jointly. (Speak to your advisor and your accountant before using this strategy.)
So, what are some of the approaches that I might advise a client to take that could lower their tax burden?
Something that happens quite a bit is that good savers don’t realize that they shouldn’t automatically wait until they are forced to start taking required minimum distributions (RMDs) from their IRA(s) to begin withdrawing money from those types of accounts (the same may apply to your 401(k)).
Yes, it feels great to have that money stashed away, out of sight, growing free from taxes year-after-year-after-year. But then you turn 72 (or 70½ before 2020), and your RMD (which is based on a complex formula that considers your retirement account balance and your life expectancy) is so large, it bumps you into a higher tax bracket and Uncle Sam sees more of it than you.
It’s all in the planning, because the first rule of donating distributions from a retirement account such as an IRA is to not make any errors.
Whether you are already taking RMDs from your IRA, or you’re going to begin soon, one potent tax-saving maneuver is to donate a portion (or even all) of it to charity. Called a qualified charitable distribution (QCD), you can lower your tax burden by donating up to $100,000 a year ($200,000 for couples). While, in this scenario, you don’t get a straight itemized write off, so long as it’s made directly, you won’t owe taxes on the gift because it doesn’t count as income.
The types of accounts that are almost always eligible for QCDs are traditional IRAs, SEPs, and simple IRAs. But, remember, mistakes are costly, and the IRS doesn’t have a sense of humor.
For instance, unlike an IRA, you can’t donate your RMD from a 401(k) until you’ve rolled that money over into an IRA. Otherwise, you’ll trigger a tax bill. Also, you can’t take an RMD and then later donate that money and then receive the same tax benefits. Besides other penalties and drawbacks, just for starters, this might impact how much your Social Security gets taxed.
So, how much can you save?
Let's look at an example. According to the AARP, if you are in the, say, 22% tax bracket and you direct $5,000 of your RMD to a qualified charity, you save about $1,100 in federal income taxes. While not the same as itemizing, this should reduce your adjusted gross income, making it the same as if you’d gotten a deduction.
Called “The Waiting Room for Charitable Donations,” a donor-advised fund (DAF) is a charitable giving mechanism established by a public charity. It’s something like a charitable investment account, whereupon your stored assets are invested, and later donated.
In this scenario, you get an immediate tax deduction, the funds grow tax-free, and then later you can direct those funds to a qualified charity of your choosing.
While their immediacy and flexibility mean that DAFs are getting ever more popular (from 2017 to 2018, the number of DAFs grew by 55%), they have pros and cons. For instance, on the plus side, besides the tax deduction, you can take your time and decide which charities you want to support. The fact is that DAFs can be terrific for people who have experienced a windfall (say, after selling a business) that is going to increase their tax exposure.
On the downside, some critics assert that DAFs keep nonprofits from building personal relationships with donors, which, when you consider that no donor information is available to the charity, might well be true. Conversely, it’s difficult to assume that the money would automatically be available to the charity were it not for the tax advantages of the DAF to the donor.
In closing, while hanging on to as much of your hard-earned savings as possible takes a plan, always speak to your accountant and your advisor before undertaking any new tax strategy.
And while forward-thinking tax planning should be an important part of every person’s short and long-term approach to money, the entirety of your situation needs to be examined for your financial professionals to know exactly which strategies you should pursue. On that note, it’s never too early to secure your tax preparation or accounting services for the future. Learn how the team at Allworth Tax Solutions can help.
© 1993-2020, Allworth Financial. All rights reserved.
Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.
1The NBRI Circle of Excellence Award is bestowed upon NBRI clients meeting one or both of the following criteria: Total Company score at or above the 75th percentile of the NBRI ClearPath Benchmarking Database and/or improvement of five (5) or more benchmarking percentiles in Total Company score over the previous survey.
2Scott Hanson (2011, 2012, 2013, 2014, 2015 & 2016) and Pat McClain (2012, 2013, 2014, 2015 & 2016). Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
3As of 12/20, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $10 billion in total assets under management and administration.
4Barron’s 2020 Top 100 RIA Firms. Barron's© magazine is a trademark of Dow Jones L.P. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors' practices.
✢Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.
✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.
†Financial Times, FT 300 Top Registered Investment Advisers, June 2019. The ranking reflects six areas of consideration including the company's years in existence, industry certifications of key employees, AUM, asset growth, SEC compliance record and online accessibility and calculates a numeric score for each company.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.