It’s not often that you are in the position to donate 100% of your income to charity. However, if you find the capacity and willingness to give, this year has special tax rules that you should be aware of.
The IRS is allowing a 100% deduction off your taxable income for charitable donations. This means that you are left with $0 in income and owe $0 in taxes! While that sounds wonderful, please don’t stop there! You want to take advantage of the following opportunities while your income tax bracket is low:
- Roth Conversions: Consider moving money from your Traditional account to a Roth account. You must pay taxes on the converted amount, so do that while your bracket is low!
- Capital Gains Harvesting: If you have no income, you can sell appreciated stock with up to $80k of capital gains and pay $0 instead of your typical 15-20%.
- Withdrawals from Tax-Deferred accounts: This counts as income, so it’s a good year to pay taxes on that income while giving money away.
- Portfolio Rebalance: Again, a good time to sell appreciated stock and rebalance your portfolio when your income is low.
Note: The 100% deduction must be made in cash directly to charities (not Donor Advised Funds or Private Foundations). This may not be the best tax strategy if you do not have cash and need to sell appreciated assets. Check with an advisor first!
Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/
Think about this is a unique year. Oh, this makes sense for my charitable giving strategy over the next couple of decades, maybe this year is a good one for doing some upfront. So think about it, but then don't stop there because you have massive savings. You can do Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton certified financial planner and charter financial counselor. Welcome to the show and our great friend, Julie is back with us again today.[:
So I thought we would discuss that a little bit today.[:[:[:[:[:
That is crazy.[:
I'm going to tell you who can do that? I have some examples for you, Julie. Now of[:[:[:[:
you can donate a hundred percent of your salary at any time. You can donate whatever you want to charities, but this year, as last year, there was a special rule in the IRS and the tax code that you can actually deduct. A hundred percent of your income off your taxes. So if you have know, a hundred thousand of income, you could donate $100,000 and , on your tax return,
I made $0 this year. I owe taxes on $0.[:[:[:[:
All right. Let me tell you a story. All right. I got a story. I've got some friends that have done this, all right. That are doing this. This is the story of Joe and Sue. All right. He's a friend of mine, clients of mine, Joe works in technology. So he's got a really good job.
Makes about 300,000 of income for their family. They're in the mid forties, Joe and Sue. They've got a couple of teenagers that we had into college soon, they've done great savings for decades. They're very heavy savers, and since Joe works in tech, has had good salary for a couple of decades.
He's worked at a couple different companies that have done really well. Okay. So say they have, I don't know, a couple million. In there maybe one to 2 million in tax, deferred accounts, tax-free account, just liquid savings and then their houses, maybe a million or something like that as well.
So about 3 million of net worth. Okay. I'm still mid-career, but done a good job saving for their five to nines for their kids. And everything's pretty smooth, in terms of their finances, knock on wood.[:[:
Yeah. Joe does. Most of the has done most of the working. Yeah. Since the kids now last year, actually it was more than a little bit more than a year ago. Sue's mom passed away. Which was not unforeseen. Okay. Sad. Of course. And they ended up with an inheritance from Sue's parents of say, let's say over 50.
Okay. So they're, they've been doing well have a through about 3 million of net worth and they get an inheritance of 5 million. Now, Joe and Sue are really charitable minded. They've always been that way, not only given to charities, but really interested in investing like the sustainable investing ESG, Sri investing impact investing, trying to do good in the world, not just by giving money away, but also encouraging, entrepreneurs and investing and that kind of.
So they plan the 5 million of inheritance. They plan on giving most of that away over their lifetime. They're not in a rush to, give that away, but they'd like to use it for impact investing, investing in sustainable businesses doing good in the world and , giving some away to charitable organizations, every year, but probably giving away all of that as it grows and continue to go over their lifetime, say the next 40 years.there's five. So this year in:
Because they have this good, large inheritance that they're not expecting to keep or save or grow for their family. They're expecting to give all of it away over time.
So they have an opportunity. For tax planning, purpose, not for, just for tax planning, they got this inheritance and they want to give away. And so that's what they've decided this year.[:
and possibly in a donor advised.[:
Like I told you, impact investing some sustainable investing over time. They're still sorting out, talking with people about where to put it. But it's just basically sitting in a bank account right now.[:
Um, and okay.
And now on their tax return, they do.[:
So it says itemized deductions did it. Oh, 300,000 of charity. So 300,000 of income. Minus itemized deductions of 300,000. You have zero taxable income. And so you owe zero taxes.[:[:
So here's how it works. So this is the end of the year, right? They've already lived, they lived off of Joe's salary. He made 300,000 this year every month. What said, 15,000 a month or something comes into his checking account and they have expenses and they spend it on their credit cards, out of their checking account.
And they did that all year, then 5 million shows up and they take 300,000 and they write a check to the wounded warriors for 300,000. So they lived off of Joseph. But on their tax return, they donated 300,000.[:[:
And Bumped up there's limits to how much you can take off your taxes. No limits how much you can give of course, but how much you can take off your taxes.And the same is true here in:
It has to be a cash donation cannot be appreciated stock or other types of assets literally just has to be cash. And it has to be to the charity can not be a donor advised fund or a private foundation has to actually land in the hands of the charitable organization[:
that's really interesting. So now let's talk numbers for say this 300,000. How much does that save Joe and Sue this[:
You want to pay some taxes while your tax rate is very low. So you don't want to just get all the way to zero, because remember there's a 10% bracket, a 12% bracket, and so paying taxes on 10%, 12% is way better than at 300,000. They're normally paying those last dollars at 32%. Remember, any last dollar that Joe makes, if he gets a bonus at the end of the. Okay.
Of $10,000, he's paying 32 cents on the dollar to taxes because they're in the 32% tax bracket.[:[:
They expect to be in high tax brackets. We want to take advantage of being in a low tax bracket. So I've got a[:[:
Here's a quick one. Why wouldn't you go to zero?
All right. Say you are at zero. Say you, they're at zero because they gave away all the. One strategy that I want to talk about is what's called tax gain capital gains harvesting. Okay. Capital gains harvesting. So now you have stock. Joe has some stock in his company and it's gone up, lots of stocks have gone up this year and last year, so it's gone up maybe a hundred percent. All right. So that a hundred percent that it's gone up over a couple of years, it's doubled in value when he goes and sells that. You're going to have to pay capital gains on the increase. Okay. 15 to 20%. Usually if you have zero income up to 80,000 of income, you pay zero capital gains tax. Okay. So Joe and Sue one strategy they could do, oh, we have zero income. Let's sell stock that has $80,000 worth of capital gains. So enough stop. That 80,000 of capital gains, and we will not pay any tax on that. Normally they'd have to pay 15% of the 80,000, so 10 to $12,000 in taxes. So they save 10 to $12,000.[:[:
To your point, go ahead and give away all 300,000 while we're at zero here's a strategy you want to.[:
That makes sense.[:
If you have[:[:
So that's definitely one thing to look at when you're at a zero, zero taxes or in your low tax bracket.[:[:[:[:[:[:
but you asked me how much are they saving total? What's the dollar figure on 300,000, you said, how many dollars are they saving in taxes on their $300,000 income?[:
And this is really. Is on the next dollar of income. How much tax will you pay on that?[:[:
So that's called your marginal rate and your marginal rate is really important where the next dollar, how much it's taxed is very important for lots of tax savings, tax planning, strategies.[:[:[:so really what you're saying.:[:[:[:
But you still don't have the 300.[:[:[:
I see. So you
have to have had a plan
to have done something like that, , it has to be part of your overall intentions and who you are as a person,[:
You saved a hundred, the government didn't get a hundred basically.
So you didn't have to pay that extra a hundred. So that's really good, right? So that's 30%. I, sorry, I keep going back to percent, a hundred thousand dollars that you saved.[:
maybe you do give that 200,000 this year. And then maybe the next few years, you give a little less than what you
might have over time, simply because you get this added tax benefit,[:[:
If you do it now, you can really save. And[:
Think about this is a unique year. Oh, this makes sense for my charitable giving strategy over the next couple of decades, maybe this year is a good one for doing some upfront. So think about it, but then don't stop there because you have massive savings. You can do someone to get back to the savings in a minute, but since you brought it up, who else might be thinking about, oh, maybe I could do that this year.
We talked about the inherent. All right. So getting that wind. It could be other kinds of windfalls. And if you're charitably minded, Hey, maybe you do have extra that you'd like to give out over time. This is a unique year to be able to do that. Another that's pretty popular this year is IPOs over the last couple of years, many companies going IPO.
I know lots of workers have been there five, 10 years of these companies, and they're just getting windfalls of a couple million dollars, and. Again, this is a really good year for doing it because you're not, you won't have that next year. And that is income. The IPO is actually income. And a lot of cases, there's lots of capital gains and other stuff, but you could have a year where your income is normally 200,000, but this year it's a million like literally.
And so now you are in higher tax brackets. So the more you give away, the better it is now, I told you this needs to be in cash. The a hundred percent, to deduct a hundred percent needs to be cash. And in that case with IPOs, you have appreciated stock. So really be aware of that work through the financials, it could be better to give appreciated stock.
So just be aware, this needs to be in cash, run the analysis, talk to a professional, or do it yourself on a spreadsheet, run the analysis. If I give appreciated stock, blah, blah, blah. If you don't have the cash, in other words, don't run out and sell stuff. And then give cash that might not be the best strategy.
Okay. So just be aware of that. A couple of other people that might be thinking about this company's sales, private company got taken over lots of mergers and acquisitions in the last couple of years. So again, you've got a windfall, a few million. You might want to consider something like this and later in life, and you're still working, you're close to retirement, you've over saved lots of people in this situation as well, just on so well saving and investing for the future.
And so this could be a unique year while you're still working. Maybe that was last couple years. Before you're about to retire. If you've over saved again, it's a unique year that you could give away and you actually have income. If you're currently retired, you don't really have the income to take off your taxes necessarily.
Something to be considered there. And even, I know now that I said that even if you're retired, if you have over saved and you've got large balances and you've got to take required, minimum distributions and other things.[:[:
So different strategy there again, but look it up. And if you're in these middle. It could be, oh, you want to take some and pay some taxes. So just be aware that this is a unique year for doing that. And , I think there's a lot of different situations where people have either an access, which is fantastic, the end they're charitably minded and they want to be giving away.
So there's a couple of examples of people that might find themselves in this situation.[:
who would give you the best advice for how to work these strategies to your address?[:
And in the future and the plan will you have. It will work. You can give away this amount of money and still be in good shape. So definitely look to a planner for having that plan, but maybe you already have that plan and oh yeah, I know I'll be fine. Then a tax professional would be great.
One CFP is, can often do the tax planning, but a tax professional. You want to run the projections. And I would do that quickly. Here we are at, latent. So you want to do that quickly with a tax professional, to run a projection about your taxes. And that also helps you to dial in how much exactly you give away in each of these buckets.
And you remember, I've got a couple more strategies that you want to consider because you don't want to just give away the money and not do other planning.[:
But I think it's worth paying the time to a tax. To just dial that in and say, oh yeah, here's a couple of strategies or a planner. Talk to them first before you hire somebody, just say, Hey, here's what I'm thinking. Here's kinda my situation. Can you help me dial in the numbers that we have a good plan?
Perfect. Make sure that they can do that. So I'd say another question.[:
that can give people a starting point to think about. They might want to do, and then they could use the checklist to find somebody to talk to and say, Hey, here are the things that I need to learn about.
that cause most of us aren't going to know we'll call the person and be like I heard this podcast, but I don't actually remember what it said. And so perhaps you can in the show notes of this podcast leave that the link to the checklist.[:
Mike Morton financial you'll find me on the interwebs. But remember, don't stop there. So we talked about capital gains harvesting, but some really other important ones are Roth conversions. Okay. So a Roth conversion is taking dollars from your traditional accounts where it's tax deferred. You have not paid taxes and moving them to your Roth, where you have paid tax.
Okay. So therefore, wait, I haven't paid taxes, but I move it and I have paid taxes. Yes. You have to pay taxes on the money you move. So if you move a hundred thousand dollars from a traditional account into a Roth account, you pay taxes on a hundred thousand dollars. Now I just told you you're at zero, right?
You gave away all your income. So you're at zero. So now if you add back in if you transfer a hundred. Then you're paying taxes on 100,000 and taxes on $100,000. I'm looking at my little cheat sheet here again is about, say 8,000 bucks.[:[:[:[:[:
What else you got? You said you had more, come on,[:
So you still you'd have that a hundred thousand of income. I'm drawing it out of my traditional I'm over 59 and a half. I can draw it out of my traditional IRA. Cause maybe I've socked away money for so long. Everything is tax deferred. I look at doing the conversion first, but for whatever reason, if you need to or want to withdraw money from your traditional accounts, pay taxes while taxes are low.
So go ahead and withdraw money from there. And then the last is a portfolio rebalancing. We talked about this earlier and earlier episode, selling some stocks when stocks are high, rebalancing your portfolio. Again, this is the same as the capital gains. It's an opportunity that you can sell and maybe pay 0% cap, $0 in capital gains, and you can rebalance your portfolio.
So the point is what you said, Julie, if you find yourself in this situation, then don't stop there. Like you've got to think of these other strategies because you've saved yourself 65. Joe and Sue have saved themselves 65,000 that they will get to pass on the charities in the future. But go ahead and save yourself another 20, 30, 40,000 as well,[:[:[:[:[:
contact a certified financial.[:
Don't think about these things, the point is the, where the raise awareness, let's wrap it up to it's a special year. You can do this. You might find yourself in this category. We talked about who might find themselves in this cat. And don't stop there, contact a professional or understand that there's more to the strategy than just giving away a hundred percent of your income.[:[:[:[:
That might make sense for you, and to look into that.[:[: