Ep. 096 - Giving Wisely: How to Be a Faithful and Tax-Efficient Steward

Episode Transcript

Austin
When we give, we reflect the heart of our generous God. But just like with any other financial decision, giving should be done thoughtfully and wisely. Not just emotionally. Today we'll explore how to be excellent stewards of our charitable giving. Focusing on efficiency and reducing our taxes. Limiting the time that we need to invest in the logistics of making gifts and keeping everything well documented for our tax returns.
All right, so, Spencer, today we're going to move from the idea of how much should I give to the idea of how do I actually do this logistically? And there's several different ways that we can manage this, but I think we want to begin by reminding everyone and reminding ourselves that we don't give to receive a tax benefit.
We give because we reflect the generosity of the Lord. And I think if we come into giving and say, okay, how can I maximize the amount that I get back on my taxes or that I reduce my tax bill? We're starting in the wrong place. We start as stewards and say these resources are the Lord's already, and we celebrate that he has given us income that we can give back to him.
And if we don't start with that foundation, then we're going to come into all of the wrong answers about giving. We might do the right thing from a tax perspective, but we need to have that foundation set first and foremost that we are not owners of these resources. We're merely stewards of God's resources. Anything else you would say before we dive into the actual logistics of what does it mean and what are the best ways, maybe that we can give in a tax efficient manner?

Spencer
Well, I think you hit the nail on the head. Just like there's no right answer to the wrong question. There's also no benefit to us if we're super efficient, but our hearts are in the wrong spot. So getting our hearts into that posture where we really are stewards, we have open hands and we listen to the father as we give.
That's where we need to be. But in the midst of all of this, he also calls us to be a steward. And just like any good steward, you keep a level of documentation. We do things with diligence, with care, and we make wise decisions on behalf of the master, and that's what we want to get into today. So as we as we think about that, there are a number of different levers that we can pull that can help us to be excellent givers in this.
And, you know, one of the first ones that we come to is a concept that many people have heard of, but some people have not. And that is a qualified charitable distribution. So this may be surprising to you if you've never heard of this, but you can make a distribution directly from your IRA if you've attained the magical age of 70.5, you can make that distribution directly from your IRA to a charity of your choice.
Now, it's important to note that you cannot give from your IRA directly to a donor advised fund. It has to be to a qualified charity there, but this could be a church or other charitable institution that you would want to give to there, and that tends to be the most tax efficient way that you can choose because it actually lowers your income.
There. So it's not even reported. You don't even have to have a level of, you know, deductions to get credit, you know, for this. It can also be helpful with respect to those, pesky surcharges that you pay for Medicare, for those income related monthly adjustment amounts, as they're known as, by lowering, again, your income.
So this is one of those really important areas sometimes that folks have not heard of.

Austin
And we think about this kind of in two seasons, you've got the 70.5 to 73 age where if you are giving charitably, let's say you're writing checks to your church or other charitable institutions from money that you are receiving, let's say, from social Security or other places. Well once you receive those, you have to pay tax on them and then get them out.
What you're saying here is we lower our taxable income because we no longer have to take those additional distributions to then pay, or then give the money to the charity. You just take it directly from your IRA to that charitable institution. The money never hits your bank account. The other piece here that we always have to remind folks, is that you can't do this from a 401k 403b or any of these retirement plans.
This is purely from an IRA. The other piece then, as we look from 73 onward, is you are taking your required minimum distributions. So the government has said, hey, you have to take these resources out. We've allowed you to save to them for a long period of time. You've gotten some benefit of saving money on tax on the way in.
It's time to start taking them out and paying tax. And so again, if you're already paying, if you're already making those charitable gifts, let's say you're making 20 or $30,000 of QCDs or of charitable gifts on a year to year basis. Well, now, if the government says, hey, you have to take 40,000 out, well if you give 30 to charity as a qualified charitable distribution, then you've only got ten to report as taxable income.
So there's kind of two levers here that we think about in two seasons with the QCD.

Spencer
It is true. And that second season can be very, very helpful in terms of lowering that tax bill. We would come back and just say overall, though, at some point you're going to have to pay tax on those distributions or your heirs will pay tax on those distributions. So the more that you get over to those charities, whether it be between age 70 and a half and 73 or even at your passing, you know, you can name a charity as a beneficiary, such that, you know, if you have 10% of your IRA that goes directly to a charitable institution, why that charitable institution is not going to pay tax on that distribution,
whereas if it goes direct to a person, what, you know, a child, grandchild, whatever it might be. Then they're going to pay taxes. They take that distribution, more times than not.

Austin
Absolutely. I think one of the lot, two of the last things that we want to come to with the QCD is there is a limit. So year on year, you can only give up to $111,000 as of 2026. Now that is adjusted for inflation year over year going forward. But that is one taxpayer if they have at least $111,000 within a traditional IRA, they can make that full gift.
So if you and your spouse each wanted to give 111,000, you both can make those gifts. But you have to have an IRA in your name, an IRA in your spouse's name. And each of those accounts has to have at least that amount. So if me and my wife are 70.5, I've got $300,000 in my IRA, she's got 50.
We can't give 222 because she doesn't have enough to satisfy that full amount. So just some thoughts to think about there. The other piece is you can name a beneficiary as a donor advised fund, and we'll get to donor advised funds later. But this is kind of like when we think about doing qualified charitable distributions and ways to give via your estate.
We'll often see clients name their donor advised fund as a beneficiary of their IRA, because it's simpler than having a charity named as the beneficiary. This is not something we're necessarily talking about here, but it kind of aligns in that same realm of if we're thinking about giving from pretax resources, opening a donor advised fund, and pointing those IRA resources, there is often easier for the charities to receive them because they don't have to set up a beneficiary IRA.
They just receive them cash from the donor advised fund.

Spencer
Right. And along with that, you know, when we're coming back to the QCD side of things, from a logistical standpoint, sometimes folks say, well, this is this might be really difficult because I'm going to have to give from my investment account here, but it can actually be quite straightforward because most institutions, most large custodians, they'll actually allow you to set up a checkbook on your IRA and just write checks.
So that tends to feel a little bit more like a typical gift to a charity. You just have to make sure that in the documentation that you provide to your CPA or if you're, you know, filing taxes, yourself, that you have the documentation from the charity, to to be able to make sure that you can show that it was a QCD.
We'll talk a little bit more about that later on. But the logistics there can be really nice, and very straightforward. In passing those funds from IRA to charity.

Austin
Absolutely. Okay. So let's move now from that QCD to something that may be more accessible for everybody. And that's just this idea. So we're going to talk now. We've got those pretax resources that we can get from. But there's some hurdles. Now we're going to look at simplicity of recurring gifts and donor advised fund. So when we think about this, this is probably the easiest way that people are accustomed to giving.
You may not actually receive much of a tax benefit now in 2026 and beyond. The federal government has said if you are taking the standard deduction, then you can still, if you've given at least $1,000 as a single person, at least $2,000 as a married couple filing jointly, then you can layer that on as an additional deduction of charitable gift.
We used to have this a couple of years ago. It was a three and $600, but they've raised that to 1000 and 2000. So even if you take the standard deduction, you can still get a little bit of an additional benefit. But most folks, if they're just giving from their checking account and savings account, with the standard deduction being over $30,000 for a married couple, over $16,000 for a single individual, unless you have high mortgage expenses and other a significant amount of charitable giving, you may not get close to that amount where it makes sense.
So at least you've got some benefit here from a taxation standpoint. But we think about automated giving. What are the things that are really crucial here that are benefits for folks?

Spencer
From a simplicity standpoint, there are a couple of different ways that we see people I think do this with excellence. First, there are a lot of churches or other charitable institutions that they actually have a donor portal that you can go in, that you can set up ACH gifts to be pushed out from your bank account on a month to month basis, or quarter to quarter or whatever cadence you really want there.
The other thing that you can do, of course, is, work with a donor advised fund. So you make gifts into that donor advised fund, and then you have a cadence that you set up, be that monthly or quarterly or annually that you're pushing out funds from that. Again, in both of those, types of experience, the portal and then the donor advised fund, what that allows you to also have is another layer of documentation usually.
So you can see, okay, this is the gift that have been made through the year. Here's who the gifts are made to with the donor advised fund. You kind of have everything together in that donor advised fund. The portal also with an individual, charitable organization can be great as well because there's a systematic nature to it. You're not going to forget those gifts.

Austin
Right. Well and I think with the two in particular, if you've only given $2,000 a year, then having one portal is really easy. If you've given $50,000 a year to ten different charities, well, now I've got ten different receipts. This is where the donor advised fund can actually be really beneficial. So let's talk a little bit more about donor advised funds.
What are some of the benefits there to utilizing those?

Spencer
Well think about it as a charitable piggy bank of sorts. You're pushing funds in, like you said, you're really only tracking your, gift receipts to that donor advised fund. You could push it out to 10 or 100 or however many different charitable institutions annually. You're not trying to track down all of those pieces of documentation. Instead, the donor advised fund is doing that.
That's part of of what you do is you put the funds there. The other thing that you have with a donor advised fund is you have complete visibility to all the gifts that you've made. Usually for several years, you know, going back so you can see. Okay, well, I gave, you know, $1,000 to the United Way last year.
I gave $5,000 to my church last year, whatever it might be. And here was the cadence of the gifts that I made. So that you have a reference point and you can see. Okay, did I forget that I gave the gift in December or. No, I need to make an extra gift here to make up for it or whatever.
It might be a very easy place to do that. Of course, one of the other pieces that can be quite helpful is that it makes giving appreciated stock very simple. So rather than trying to give appreciated stock to multiple organizations, some of which may not be very good at receiving that and then giving you documentation on that, if you give the, appreciated stock to a donor advised fund, their experts typically and being able to document that get that you know, into the fund sold and then available for distribution.
So as you do that, you also, of course, are able to reap the tax benefit of that, typically, if you have appreciated securities, you're not paying, capital gains, you know, on the amount that you would have otherwise. So if you had, you know, $10,000 of Apple stock and the cost basis was $1,000, if you sold it, you would have that $9,000 capital gain.
Then that would have to be reported in your tax return. If you instead give that directly to the donor advised fund, you get credit for the full $10,000 gift. The value, the fair market value of of the Apple stock. But you're not paying that $9,000 of long term capital gain. So some really helpful things. There, the donor advised fund will then allow you to use those resources, put it in cash, or even have it invested within the donor advised fund for distributions at a later point.

Austin
Absolutely. And donor advised funds are great for specific individuals with specific goals. If you're just giving $1,000 a year, the donor advised fund is not going to make a tremendous amount of sense to you. So this is where we would say you kind of have to look at the greater picture. Are you clumping and bunching multiple years of giving into one year to exceed the standard deduction?
Are you do you have a complex event that has happened, the sale of a business, an inheritance that you're wanting to give out of for some of these events and some of these unique cases, the donor advised fund makes a tremendous amount of sense. Now, again, if you're giving a small amount on a year to year basis, the complexity and the cost of the annual or the ongoing maintenance, the fees for a donor advised fund, it probably doesn't make sense in your specific situation.
And so we'd say yes, we love donor advised funds. So they create a lot of simplicity for individuals that are giving over and above the standard deduction. But it's not for everybody. So let's go ahead and then talk about this idea of record keeping. Why is this so critical?

Spencer
Well, at the end of the day, you just don't want the IRS giving you a call or sending you that letter. And if they do send you a letter to audit you, you'd like to know that you've got all of your ducks in a row. So when we when we think about this, this is just, again, it's stewardship.
It is, you don't own these resources. You are taking care of them for, a master, who is in heaven. And if you can keep good documentation, it's not just for the IRS. It's also for you that you know where these these funds are going. And you can keep good records of all of those. That's one of the reasons that a donor advised fund can be so nice and that, you see all of that recordkeeping kind of in one portal and there's a simplified, format to it.
But we really want to, keep good records and then file with integrity, have those records, you know, readily available. So just a quick reminders here. Of course, gifts over $250 require written acknowledgment from the receiving charity for those tax deduction purposes. The DAF can be quite helpful in keeping track of all of those things. You want to keep a clear record of of all of the gifts, including qualified charitable distributions, anything that goes to a donor advised fund, any cash donations, anything that you would take that would be an in-kind gift that you might take to Karm, you would want to show is as a way of saying, okay, this was the value.
Here's how I came to this value, just so that again, if you were audited, it's very simple. And handing everything over to show that documentation.

Austin
Absolutely, Spencer, I think that there's a that's a really good overview and recap. And again, as we think about these different strategies, whether it's the QCD, simply giving out of your bank account or doing it from a donor advised fund, really we look at this and we say each of them are strategic in their own way. And but as we step back as stewards of the Lord's resources, we don't want to be doing this in a way that's unwise.
And so if we can save on taxes again, we don't want that to be the primary lever of why we give. But it's a secondary lever. If I can give via a qualified charitable distribution versus maybe taking a distribution that I've got to pay 22% federal tax on, or I would rather all those resources go to the charity.
If it means I can give stocks out of my brokerage account amount out of my non-qualified account to a donor advised fund, and never pay the tax on that. Most folks that we know don't want to give a tip to the IRS when it's an unnecessary tip. And so really, this is a matter of stewardship. More than anything.
It is are we taking the wise steps with the resources that God has placed in our hands to maximize the benefit that those charities receive and minimize the tax that we pay? So clients, if you have questions about ways that you can give charitably, we would love to have that conversation with you. As always, feel free to leave comments down below and we'll see you again next time.
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Disclaimer
This content was provided by Second Half Stewardship. We are in Knoxville, Tennessee and you can visit our website at www.secondhalfstewardship.com. The information in this recording is intended for general, educational and informational purposes only, and should not be construed as investment advisory, financial planning, legal, tax, or other professional advice based on your specific situation. Please consult your professional advisor before taking any action based on its contents.