Individuals, foundations, bequests, and corporations gave an estimated $449.6 billion to U.S. charities in 2019, according to findings in Giving USA 2020: The Annual Report on Philanthropy for the Year 2019.
Individuals accounted for an estimated $309.7 billion, up 4.7% in 2019 versus the prior year. Foundations added an estimated $75.7 billion, while another $43.2 billion was given by bequest.
We tend to think about charitable donations around the holidays. It’s year-end and your gift to a charity may be sparked not only by your desire to help others, but by tax planning strategies.
The standard deduction is much larger today thanks to 2018’s tax reform, which reduced the incentive to give for some folks. Gifts to a charity can only reduce your tax bill if you itemize when filing. If you were unable to itemize, 2020 came with a small concession. You could deduct up to $300 of cash donations without having to itemize.
But let’s not forget that your gifts will not qualify for a tax deduction unless they are received by a tax-exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. For example, making donations to a personal fundraiser through GoFundMe is growing increasingly common, but they are not tax deductible.
While ensuring sure your gift is tax deductible is one challenge, there are others you’ll need to navigate, too.
Let’s review seven potential potholes to avoid when it comes to charitable giving.
Here are some ideas. You might consider educational charities, culture and the arts, health and organizations that look for treatments and cures for diseases, charities that benefit animals or the environment, your church or place of worship, human services, international relief, or organizations that support the poor in your community.
The choices are almost limitless. Your resources are not.
According to CharityWatch, “Ask how much of your donation goes for general administration and fundraising expenses and how much is left for the program services you want to support. Most highly efficient charities spend 75% or more on programs.
“Keep in mind that newer groups and those that are working on less popular issues may find it necessary to spend a greater percentage on fundraising and administrative costs than well-established, popular groups.”
According to Smart Asset, which reviewed a report by the Tampa Bay Times and The Center for Investigative Reporting, 50 charities collected more than $1.35 billion in donations. Yet, $970 million went not to worthy recipients, but to the people who collected the money.
You desire to support your cause, not enrich the fundraisers.
A small effort on your part, i.e., “kicking the tires” of the charity, will go a long way. There are several charity watchdogs you can find online. Do your homework. You may find your decision reinforced by what you find. Or you may decide to steer clear of a particular organization based on your research.
Just be careful. You may want to concentrate on causes that have special meaning to you.
Furthermore, be careful about what might be called the flavor of the month. For instance, when a disaster occurs, there are reputable outfits we are all familiar with.
Sadly, fraudsters can also play on our desire to help. Donate here and little if any money will make its way to those suffering from a natural disaster. Instead, your funds may simply line the pockets of scammers.
Will you be paying higher taxes on your capital gains?
The short answer is probably “No.” The longer answer is, “I don’t know” because tax hikes proposed by the president may or may not be enacted into law by Congress.
Last month, Joe Biden unveiled The American Families Plan, which among other things, proposes to raise capital gains taxes on long-term capital gains—on the sale of assets held more than one year—for households earning more than $1 million in income.
This won’t affect most people, at least directly. I don’t plan on diving into the economics behind the proposal. But if the plan becomes law, let’s look at ways we can use tax planning strategies to avoid or lessen the impact.
Thanks to a stronger economy, the successful rollout of the vaccines, very low interest rates, and more, stocks have rallied sharply over the last year. You have benefited, but the sale of an asset could create a tax liability, depending on your tax bracket and how long you’ve held the asset.
Today, the maximum long-term rate on capital gains is 20% plus the 3.8% net investment income (NNI) tax on certain income (www.irs.gov).
But if you earn more than $1 million per year, listen up. Your rate may go much higher.
Currently, ordinary income is taxed no higher than 37.0%. That could rise to 39.6% if the president’s plan is approved. If you earn over $1 million, you’ll may pay that 39.6% rate on the sale of assets held over one year plus the 3.8% NII tax.
It’s a substantial increase in taxes for the wealthiest Americans.
How might we lessen the impact, assuming we see a big increase in the capital gains rate?
However, there is an important caveat: the time-honored tradition of passing on assets to heirs without paying taxes could be in jeopardy, which most of you know as the stepped-up basis at death. In his proposal, the Joe Biden wants to trigger taxes on unrealized gains passed to heirs]]. This would occur after a $1 million exemption.
In a perfect world, we would not allow investment planning to be affected by tax planning. But tax laws and tax planning do affect investment planning.
Biden’s proposals are a long way from being enacted into law. They may be modified in Congress before any bill reaches his desk and is signed into law. Our team will be closely monitoring the situation. We can become more proactive when we have a better idea how everything will shake out.
As always, we encourage you to consult with your tax advisor before implementing any tax strategies.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg Barclays US Aggregate Bond Total Return
Source: MSCI.com, Bloomberg, MarketWatch
MTD: returns: Mar 31, 2021—Apr 30, 2021
YTD returns: Dec 31, 2020—Apr 30, 2021
*in US dollars
I trust you’ve found this month’s Eagle’s Eye to be educational and informative.
Let me once again emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters at all, please feel free to give me or any of my team members a call. In addition, if there is anyone you care about who you think could benefit from a fresh perspective, I would be happy to visit with them.
As always, we are honored and humbled that you have given us the opportunity to serve as your Family Wealth Advisors.
William Y. Rice III, CPM® | Eagle Capital Advisors
Founding Partner, Managing Director & CEO, ECA
Wealth Advisor, RJFS
140 E Tyler Street, Suite 240; Longview, TX 75601
T: 903.236.5300 | F: 903.236.5357
Eagle Capital Advisors is not a registered broker/dealer, and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries*. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of William Y. Rice III and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee
that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does
not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information.
As you embark on your wealth management journey, you may wonder whether financial advisors truly add value to your investments. By answering these five essential