Five strategies for tax-efficient charitable giving this year

Investor Services Client Webcast Transcript for 
"Five strategies for tax-efficient charitable giving this year"
(1022-2LJ9)

MICHELLE MOSKONAS:  Hello, and welcome to the Schwab Charitable Webcast, Five Strategies to the Tax Efficient Charitable Giving This Year. I’m Michelle Moskonas, Managing Director of the Southeast Branch Network, and I will be your moderator during this event. Before we begin, I want to start with just three quick housekeeping items. 

First, at the bottom, the right bottom side of your screen, there’s a widget dock. And right at the bottom of the right where it’s a webcast console, you will see different widgets, and if you hover over those widgets with your mouse and click on it, you can see what each of them does. For instance, if you want to make any of the windows that you’re viewing a little bit larger, you can grab one of the edges and make it as large as you want for whatever is comfortable as you view our webcast here today.

Second, we hope that you ask us questions, and we’ll have a Q&A session at the end. And the way you would do that is you go to the Q&A widget, aptly named, type in your question, and we hope to get to as many questions as possible. So, we look forward to answering your questions. 

And third, and, finally, at the very end of the webcast, you’ll see a very short survey. We really value your feedback. Any observations you have, anything we can do better or differently that we can serve you, please let us know. It’s very important for us. 

So, now, let’s get started. And in the spirit of asking questions, I’d like to ask each of you who are attending here, two questions that you would ask yourself. First, what motivates you to give at this moment? You know, think about what your motivation is to be giving. And the second question that I’d like each of you to ask is, you know, what do you want to change in this world, and how could that giving make a difference? 

And as an attendee here in our webcast today is likely that you consider yourself charitably inclined, that you’re thinking about giving back, and you’re thinking about your plan and how you’re going to do that. One of the things tied to that is I want to make a big point and remind you if you aren’t aware, we have Giving Tuesday. What is Giving Tuesday? Giving Tuesday is a global generosity movement that encourages people to give back to whatever charity they think is most important and really resonates with themselves. And you would ask, ‘Well, when is this, Michelle?’ It’s November 29th, Tuesday, November 29th. And you could think, ‘Wow, that’s a ways away.’ But not really as we’re rounding out the year. So, we would like you to think about today as being a launchpad for all of your plan giving and thoughts that you have about Giving Tuesday. And as you think about your philanthropic journey, as you think about your plans, wherever you are, think about why and how you can give, and think about, you know, the catalyst that drives you to do that. I hope today will help you feel even more connected with the charity goals that you have and have even more clarity about your plan giving.

So, with our housekeeping rules behind us, and the two questions that I ask each of you to think about, I’d like to introduce our guests. So, today, I’m very, very pleased that we have two very, very special guests. First, I’ll introduce Brian Howell. Brian is the Director of Relationship Management here at Schwab Charitable. And second, and he will join us after Brian, let me introduce Hayden Adams. And Hayden is the Director of Tax and Financial Planning at Schwab Center for Financial Research. Two very special guests. And we will first start with Brian. So, Brian, welcome to the virtual stage.

BRIAN HOWELL:  Well, thank you, Michelle. I appreciate that. We are excited to share some great information over the next hour. On today’s call, we’re going to be discussing charitable trends in the current giving environment, we’ll tell you a little about Schwab Charitable, and then share about tax efficient strategies for charitable giving in 2022, the Schwab Charitable Giving Guide is a powerful resource that helps you build a strategic giving plan, and other philanthropic resources to help you maximize your charitable impact. Let’s go ahead and get started.

Charitable giving remains strong in the US, with total giving staying relatively flat from 2020 to ‘21. I’m going to call out a couple of trends in this growth chart that you’re looking at here. Total giving reached almost $485 billion in 2021. Now, that’s a 4% increase in current dollars and staying relatively flat with 2020 when on an inflation-adjusted basis. In fact, total charitable giving has increased or stayed flat in current dollars every year since 1981, with the exception of three years. For those of you that have been around as long as I have and have been involved in the markets as long as I have, those three years, 1987, 2008, and 2009. So, some of us remember what the market was doing, and the economy was doing during those years. In 2021, individuals, foundations, and bequests… that’s giving it death… reached the second highest levels of giving on record.

So, what’s Schwab Charitable? We are an independent public charity created to help in increase charitable giving in the US through a simple tax-smart giving solution of a donor-advised fund account and other philanthropic resources. That’s our mission. That’s what I get to roll out of bed every day and do, is to help increase giving in the US. So, we have a fun time doing it, and I hope that you learn why that is as we go through the presentation today. 

A donor-advised fund account benefits both donors and charities. It’s important to point out that not all charities are able to accept gifts of appreciated assets. That’s one of the ways donor-advised funds benefit both donors and charities. Donor advised funds, which are 501(c)(3) public charities, typically have the resources and expertise for evaluating, receiving, processing, and liquidating the assets. That process can be challenging and costly, so some non-profits might not have the capacity to accept or efficiently process these types of donations. A donor-advised fund account also enables donors to contribute highly appreciated, concentrated positions to diversify their position in a tax-effective manner.

In July, we released our 2022 fiscal year results, reporting that Schwab Charitable donors increased grants to charity by 27%, to more than $4.7 billion. And we’ve seen that a key reason for increased giving in at least the last 12 months was to help those impacted by current crises at home and abroad that continue to unfold around us and stay very top of mind. 

Now, taking a look at the bigger picture, Schwab Charitable clients have granted $24.2 billion since our inception at Schwab Charitable in 1999, to over 215,000 charities. We’re very excited, super excited, for the work that they’ve done in that space. 

Now, I’d like to bring us into today’s giving environment. This year has been a remarkable year, where we’ve actually seen an increase in charitable giving, believe it or not. With regard to recent economic conditions, 2022 has put Americans through the highest inflation in over 40 years, rising interest rates and frequent volatility in the US stocks, as well as other asset classes. The deepening crisis in Ukraine and many other recent disasters this year has continually put philanthropy in the critical role of providing humanitarian support in the short- and longer-term. Given all this, donors are determined to respond to the unprecedented and to continue their support of the causes important to them. In fact, in the first six months of 2022, Schwab Charitable donors granted $2.1 billion to charity, which is a 16% increase over the same period in 2021.

Let’s also consider existing tax benefits. Charitable contributions are deductible for donors who itemize deductions when filing their tax returns. Annual deduction limits for gifts to public charities, including donor-advised funds, are 30% of adjusted gross income, or AGI, for contributions of non-cash assets if the assets were held more than one year, and 60% of AGI for contributions of cash. Contribution amounts in excess of these amounts may be carried over up to five subsequent years, so six subsequent years, or full years that you have to use that deduction. This will be important to keep in mind as we talk about how donors can continue to give in the most tax-efficient ways.

Now, if you’re facing a taxable event this year, consider taking advantage of opportunities for tax-smart charitable giving. Some of these on this slide might look familiar to you. One option is a Schwab Charitable donor-advised fund account, which is appropriate for all charitably minded individuals and families, regardless of your generation or your wealth level. The donor-advised fund accounts are appropriate for donors who want to decrease their tax bill. That’s most of us that want to decrease our tax bill. Based on our own internal survey, tax benefits are the number one reason our donors open their accounts. Donors tend to want to reduce the burden of potential taxable events, such as rebalancing portfolios, experiencing a large income year, possibly a windfall, a Roth conversion, and more. 

Now, with that context, I’m excited to turn it over to Hayden Adams to talk about tax-smart charitable giving strategies for this year. Hayden, it’s all you, my friend.

HAYDEN ADAMS:  Thanks, Brian. So, what we’re going to do is we’re going to go over some of the most impactful methods for maximizing the tax benefit of your charitable giving. Now, we actually have an article we recently published that goes over a bit more than what we’re talking about here in this presentation, because there’s some actual pretty complex methodologies to do giving, such as using trusts and many different things like that. But what we’re going to do here today is talk about the strategies that work for the vast majority of people. And the five that we want to talk about is giving appreciated assets, and why that makes a lot of sense and can be better than giving cash. How bunching your concentration… gifts into a single year, concentrating them into a single year, can help you maximize the tax benefit. And then, third, we’re going to talk about giving retirement assets. That’s a big thing for a lot of people. There’s something called a qualified charitable distribution that a lot of people are interested in, and we’ll talk about a little of why it can be good, and why, sometimes, maybe it’s not the best option. And then we’ll talk about… you know, we’re in a down market right now, so we’re going to talk a little bit about like how can you use some of those losers in your portfolio to potentially not just offset some of your other gains but get a tax deduction for making charitable donations. And then, finally, I do want to talk a little bit, specifically, about why a donor-advised fund from a tax professional’s perspective is an excellent tool to use. 

So, let’s jump right into this first one, donating appreciated assets. So, to start out, to give you a little bit of background on donating appreciated assets, one of the unique things is the Tax Code has some interesting stuff in it, that they give a special benefit to individuals who donate long-term assets that have appreciated in value. So, say, you’ve owned the stock for over a year and a day… so in order to do this, it has to be a long-term appreciated asset. It could be, not just a stock, it can be some other things, too. But in this situation, what the IRS says is, ‘Hey, because you did this, you made a donation of this appreciated asset, you know, directly to the charity...’ it can’t be like I took the asset, sold it, generated cash, and then generated the cash. You have to donate that asset directly to the charity. But when you do that, what you end up getting is, potentially, a tax deduction for the fair market value of that asset and you don’t even have to recognize the capital gain. So, it’s like a double whammy, you’re getting this awesome double benefit. You don’t have to recognize the gain, yet you get a total deduction equal to the fair market value of that asset. That’s very powerful. And what I want to do is show, within an example, why it’s powerful, with actual numbers. 

So, let’s say, you’ve got a donor here who wants to give to a charity. And they’ve got $50,000 of assets. So, let’s just say it’s stocks that have appreciated to $50,000. They originally purchased those stocks for $5,000, right? This individual is in the 15% long-term capital gains tax bracket. So, they have two options: They can sell the asset, generate the cash, and then make a donation, or they can just go skip that whole selling the asset part, take the asset, directly deposit it into the charity’s bank account... basically, account, and give it right to them. And one of them results in a much better tax situation. And, obviously, you can see here, the reason we’re talking about this, because donating appreciated assets is very powerful. So, what happens here is you’ve got $45,000 of gain. So, if you sold those assets, in that first scenario, in option one, if you sell those assets, what ends up happening is you have to recognize a capital gain. That capital gain, again, is taxed. It results in approximately $6,700 worth of tax. So, you end up paying the tax, and you’re left with $43,000 that you still have leftover to donate. You donate that amount. You get a deduction for it. But the thing is, is like you’ve already paid taxes, so it has to offset the taxes. So, the net tax savings from that donation is, actually, a lot less than you might think it is. It’s only up around $3,600 in this example. Now, what ends up happening is, if you donate the assets directly to the charity, well, you never have to recognize that $45,000 worth of gain. That $45,000 worth of gain, basically, just disappears. So, there’s one thing gone off the table, right? So, your taxes didn’t increase, but you get a deduction for the full fair market value of that $50,000 that you just donated. So, the net effect of this is, basically, a $12,000 charitable donation deduction that offsets your ordinary income. So that’s a significant savings over donating the cash because it’s just less efficient to donate the cash, have to recognize the capital gain, because now when you make your donation, you’re going to have to offset some of the capital gain. Then you’ll finally be able to offset some of your ordinary income. 

So very powerful strategy that I think everybody should consider. And basically, the more appreciation you have, the more powerful this strategy actually becomes for you.

Now what assets can you donate? Well, you would be surprised it is almost anything. So, it’s not just stocks. Those are the easiest. That’s a really easy one to donate. All you have to do is take the shares, move it over one place to another. Depending on what firm you’re with, whether it’s Schwab or others, it can be easier or more difficult. But it’s just pretty straightforward process at Schwab because we really do want to support people who get. But it’s not just stocks that you can give, I mean, you know, like publicly traded stocks. It could be stock of your own private company. It could be shares of like an insurance policy, something like that. It could, you know, be art. We’ve even had people… I’ve heard stories from Schwab Charitable of people donating cattle. So, Schwab Charitable doesn’t necessarily have you deliver the cattle to our branch, but they can take possession legally of that cattle, sell it, and, you know, recognize the gain for you through Schwab Charitable. And then you don’t have to recognize that gain, generate the cash and make the donation, so you get a bigger tax benefit. And, again, even things like real estate, houses, land, all this kind of stuff can be donated. But, again, some of those donations are a little bit more complicated to deal with and not all charities are set up in such a way as to effectively manage those types of donations. They prefer cash. They want you to pull your credit card, check, cash, because that’s the easiest thing for them to deal with. But, unfortunately, it’s not the best thing for you when it comes to getting a tax deduction. So, donating appreciated assets is definitely one of the ones that I think everyone should consider when they’re thinking about giving.

The next strategy that is really powerful but is a necessity these days. Because of the tax Cuts and Jobs Act that passed back in 2017, the standard deduction changed. And what ended up happening is the standard deduction basically doubled, and it’s going up even further from there because of, you know, inflation, adjustments, and all that kind of stuff. So now a married couple, the standard deduction is like 25,000-ish. And in order to get a tax benefit for your giving, you actually have to be able to itemize, right? So, you can’t just give a tax deduction just because you gave, you also have to meet the requirements of itemizing your deductions. And the general rule when it comes to itemizing is… it’s pretty simple. Don’t itemize if the standard deduction is bigger, you take the bigger one of the two. Whichever one’s bigger, is going to give you the bigger tax benefit. So, the goal is to try when you give, to give in such a way that you break the barrier of the standard deduction. 

And so, one way to do that… because of, again, that larger standard deduction that we now have, one way to do that is to concentrate your giving into a single year. And I’m going to go through an example here of why this is a powerful tool and how it can result in a bigger tax benefit to you. 

So, in option one, let’s say you’re an individual and you give to charity every year. Let’s say it’s your church, right? Easy example. Like every  year you give $10,000 to church or you give $10,000 to the Humane Society, something like that, right? Well, if, say, you also have $13,000 of other tax deductions, let’s say that’s like mortgage interest and taxes you pay at the state level or something like that. Right? When you add all those up, it only equals $23,000 in option one. And because of that, the standard deduction is actually greater than the itemizing. So, obviously, you’re going to use the standard deduction. You want the bigger tax benefit, right? So, some people look at that and say like, ‘Oh, well, it means I lost donation deduction.’ And it’s like, well, yes and no. You haven’t lost anything because you still got a bigger deduction by taking the standard deduction. But if you concentrated your giving into a single year, what could end up happening is, is you could actually get a bigger deduction over a two-year period, or it could be a three-year or four-year period.

So now let’s look at option two. Let’s say you have the means to concentrate all your gifts into one year, right?  So, like over two-year period, instead of giving $10,000 each year, you end up giving $20,000, in total, in one year. What ends up happening is that you have that $20,000 with the $13,000 of other deductions, like your mortgage and stuff like that. It comes out to be $33,000. That $33,000 is greater than the standard deduction. So, you end up itemizing. Then in the next year, because you concentrated the giving, you don’t make any charitable donations. So, all you’ve got left now is that mortgage interest and stuff like that. That’s way below the standard deduction. So, in the second year, you take the standard deduction. So, when you add up the net tax deduction over that two-year period, what you find in the first option, you had about $51,000 of total deductions over that two-year period just by using the standard deduction. But what you end up with by concentrating your giving is you end up with $58,900 of deductions by concentrating your giving. So, you end up with $7,900 more deductions over a two-year period by concentrating your giving. 

Now, one of the complaints I tend to get when I give this example, like people would come up to me after I do a presentation when I was doing presentations back in person, is they would say like, ‘Hayden, I love this idea of bunching and concentrating gifts, but here’s a problem I see in that. You know, like my church or whatever charity I give to, they know that I’m always giving this amount every year, right? And if I give $20,000 in one year, two things could happen:  (a) they’re going to think like I’m going to give $20,000 every year going forward, and that’s not necessarily what’s going to happen, or (b) like it kind of puts them in a weird planning scenario because now they’ve got $20,000, but they don’t necessarily know that they’re not going to get something the next year, so it could put them in a bad situation for budgeting. Right? So how can I make this gift happen and do it in such a way that maybe the church doesn’t even, or charity doesn’t even know it happened?’ Well, again, that’s where the donor-advised fund is a great tool because you can donate… make the donation to the donor-advised fund, right? Then you get the deduction in the year that you make the donation to a donor-advised fund. But you can grant out the assets little by little. So, you can still get the $20,000 deduction this year and then take and give out $10,000 each year, so that the charity, they have no idea that anything changed. All they see is the normal $10,000 you were giving, but you maximized your overall tax deduction. So that’s why that’s a very interesting and powerful tool.

Now, it isn’t going to work for everybody. You got to do the math. Probably going to have to work with a tax advisor or maybe somebody, you know, with some like good math skills to kind of plug the numbers and see if, ‘Hey, does this make sense for you to concentrate your giving?’ Because for some people it might take concentrating three years of gifts, or maybe it won’t work because perhaps you don’t have the means to make that type of donation in a single year. But it is something to consider. It’s food for thought. 

So, the next strategy is giving retirement assets. Now, this is the most common way people save for retirement. The vast majority of people have their savings within some kind of tax-deferred retirement account, generally speaking. So, what ends up happening, eventually, is that some of us, we become insanely good savers. We save to the point where we actually save more than we actually need to live on, right? And what eventually happens is that there’s this thing called Required Minimum Distributions, which kick in at age 72. And because of that, like you’re going to be forced to take money out of your retirement account whether you want to or not. And for some people that actually bumps them up into a higher tax bracket. So, like, say, you only need $100,000 to live on in retirement. And that’s what you’ve been pulling from your retirement account, it’s all fine, and then you hit age 72. And. Suddenly. Now. you got to pull out $150,000. It’s forcing you to take $50,000 more than you actually need to live off. And so, your tax bill jumps. And, you know, a lot of people don’t like that scenario. 

Well, one option that you can do to help offset some of the impact from those Requirement Minimum Distributions is what’s called a Qualified Charitable Distribution, a QCD, for short. Saves me having to say it over and over again. But what a QCD does is it says, ‘Okay, once you reach a certain age…’ Now, strangely enough, the age for a Qualified Charitable Distribution is not the same as the age for Required Minimum Distributions. It used to be. But when the Tax Cuts and Jobs Act passed, they changed the age for Required Minimum Distributions to 72, but they did not change the age for QCDs from 70-1/2 to 72. So, you can still do a QCD even before you hit your RMD age, right?  But once you reach 70-1/2, you can begin taking up to $100,000 from your account and directly transferring it to a charity of your choice. And that, the nice thing about it is, is it never comes into your account. Now, you don’t get a tax deduction for it. That’s kind of one of the downsides, and we’ll talk about that a little bit here in an example. But you don’t have to take it into your income, so you don’t get that bump up in tax bracket. If you’re charitably inclined, you know, that’s wonderful because then you don’t have to use your cash to make a donation, you can use this retirement asset. You can give up to $100,000. It will cover your required minimum distribution, and you can do it year after year after year. And it’s not just you. So, these are from IRA accounts, so these are distributions from your individual retirement account. So, you and your spouse could have accounts. So, potentially, you could both double-up. You could give 100,000 and your spouse could give 100,000. That’s a pretty significant gift right there. Very powerful tool. And the nice thing about it is by giving from your retirement accounts, you’re lowering the retirement account value, which means the next year maybe your required minimum distribution is a little bit lower. So, it has the effect of giving, not taking an income and lowering your potential future distributions from the account. 

And one more great thing that we have here at Schwab that we’ve recently rolled out a new tool that can help you actually plan this out. So, we have actually got a tax planning tool within Schwab Plan where you can meet with a financial advisor, and they can actually model out how a QCD could help save you on taxes. So, it’s something to consider, you know, if you have a Schwab wealth advisor, who can help guide you through this process. 

Now, here’s one scenario where I want to go over that’s like... you know, in the media they talk about Qualified Charitable Distributions as if it’s the greatest way to give, since any form of giving was ever created. And I do agree it is a very powerful tool, it’s a very interesting way to give, but it’s not necessarily always the right one. Just because it’s a good one doesn’t mean it’s the perfect one for your exact scenario. So, I’m going to give you an example here why it’s not always the best option to use a qualified charitable distribution and it could be better to give appreciated assets. So, like I said before, when you do a QCD, you don’t have to take that money into income. Let’s say it’s $100,000 you gave through the QCD. You don’t have to take in an income, but you, also, you don’t get a tax deduction. All right?  So, no deduction, but no income. That’s great. All right. Now, if you give appreciated assets, again, there’s that weird law that was created that says even though you don’t have to take the appreciated asset into income, you still get a deduction for its fair market value. That’s interesting. That can be very powerful. 

So, let’s imagine a scenario here. You’ve got an individual who wants to give $100,000 to a charity. They have two options to that. They can give a QCD of $100,000, or they’re also going to be selling some assets this year just because it doesn’t fit their needs and they just want to sell this asset and there’s $100,000 of gain in that asset, let’s say. So, which of the two would be better for this individual to give? And we’re going to assume that the individual meets all the requirements when it comes to itemizing and that all the limitations on itemized deductions. Right? So, this person’s income and adjusted gross income is high enough that they can take the full deduction for any assets they give through giving appreciated assets. Well, in the scenario, if they gave the $100,000, what would end up happening is that never goes into income so it kind of disappears, and yet they still sell the asset that has $100,000 gain built into it, and they must recognize that gain and it increases their taxable income. 

Now what if they did the opposite?  Well, if they did the opposite, what ends up happening is they take the required minimum distribution and have $100,000, right? So that increases their income by $100,000. But what they do is they give the appreciated asset directly to a charity, they never sell it, they give it right to the charity, they don’t recognize that income, and then that income comes over and wipes out that gift of $100,000, basically blankets and covers up the Required Minimum Distribution, and it disappears, and their income didn’t go off actually. 

So, it can be a very powerful tool and result in actual lower taxes by giving appreciative assets in some situations than it is by using a qualified charitable distribution. And as a general rule, what I would say is the higher your income level, there’s a more likely chance that giving appreciated assets will be more powerful than a Qualified Charitable Distribution. But in the end, it’s kind of a math problem, right? You’re going to need to sit down with your tax advisor and probably crunch the numbers. 

And that’s one of the big takeaways that I really want to encourage people to think about when you’re doing any kind of charitable giving, right? And this isn’t just charitable giving, it’s any kind of tax planning. Invariably, what I see with a lot of people who make mistakes when it comes to tax planning is that they do something, and then go to their tax advisor and say, ‘Hey, here’s what I did. Make it work.’ When you do charitable giving and all this kind of tax planning, the key is preparation. Before you click any buttons and do any trades or transactions, or, you know, sell assets to generate money for a charitable gift, just hold for a second, and take the time to really think about what is the best option. Meet with a tax advisor and actually have them run the numbers for you and see which is going to give you the biggest benefit, because it could literally be tens of thousands of dollars of extra tax if you choose the wrong one. So, it’s worth taking that little extra time, doing the calculations, and figuring out which is the best option for my particular situation. Because, yes, there are rules of thumb that certain ways to give are good, but for every rule there’s an exception to the rule. And so that’s why I encourage you to really take the time to do some charitable planning. You know, you can talk to an advisor, a financial advisor at Schwab or any other firm, or you can talk to somebody at Schwab Charitable. They’ve got great advisors at Schwab Charitable who can help you strategize to find the best way to maximize your gift. But I definitely encourage you to do that before, not after, because after the fact, once you’ve done the trade and the transaction, it’s kind of set-in stone. And so, you have to plan these things out a little bit.

Now, the next thing that I want to talk about is kind of particular to our current environment, with the stock market kind of acting a little wonky lately, right?  You know, we’ve been used to the stock market kind of just going up and up and up for the last few years, and, you know, this year’s been a little bit tumultuous. And in that, you end up with some stocks that might not be producing the results you wanted. They, literally, might be losers. They may just not even fit your plan anymore. ‘This company is just not what I’m interested in holding anymore. I don’t like this stock. I want to reallocate my portfolio.’ Well, in the process of looking at those stocks that are in a losing situation, it could be a potential opportunity to get some charitable donations and get a deduction for that. 

So, when it comes to donating assets that like have not appreciated in value… so we were talking earlier about assets that have appreciated in value and they were held long-term. Well, what if the asset you’ve held it long-term, but it hasn’t appreciated in value, what do you do then? Well, what would your deduction be if you donated an asset? Well, it could be the fair market value, and the fair market value is below what you paid for the thing. So, it doesn’t make sense in this scenario to take a deduction for the fair market value. You want the biggest deduction you can possibly get, right? Well, if you’ve got an asset that is a loser, well, you may want to do what’s called tax loss harvesting. It’s an incredibly powerful strategy that can help you reduce your capital gains and even, potentially, offset some of your ordinary income.

So, the way it works is, is you’ve got to stop that’s lost its value. Its current value is below what you paid for. So, you bought it here, it did go up at one time, and then it came back down and now it’s below its cost basis for that asset. Well, you could sell that asset. It can generate a loss for you. That loss then can be used to offset other capital gains. Then any loss that’s left over, let’s say, the loss was bigger than your capital gains that you recognize. So, let’s say you had $20,000 of capital gains that you recognized this year, but you had a $25,000 loss from that asset you just sold. Well, what ends up happening is that asset you sold will offset all $20,000 of those other capital gains. It can then be used to offset up to $3,000 of your ordinary income. And then, finally, you get that last little bit, that last $2,000 that can just be carried forward to offset future capital gains. So right there you’re getting a tax benefit. Then, let’s say, that that money that you sold, that asset that you sold, generated cash. That cash, you can either reinvest it or you can give it to a charity. And then what happens is, is if you, you know, have enough to itemize your deductions and you gave that cash to the charity, then you now potentially get another deduction in the form of a charitable donation deduction. So, you got kind of three deductions here. You’ve got… you know, the loss offset your other capital gains, it offset $3,000 of ordinary income, and it offset even more ordinary income through itemizing charitable deduction.

So incredibly powerful way to give. And that’s, again, why it’s important to strategize about this stuff because, you know, like there’s all kinds of ways to give. And it’s like, you know, giving, in itself, is a great benefit, you know, helping others is awesome, but it doesn’t hurt to maximize your tax benefit in the process, also. The primary purpose here is to give and to help others and certain charities, but, you know, the icing on that cake is to maximize the tax benefit, and that’s where strategizing that gift comes into play.

Now, finally, I did want to talk a little bit about, specifically, donor-advised funds from the perspective of a certified public accountant. And why do we, like myself and all of my friends who are certified public accountants, why do we like donor-advised funds so much? There’s all kinds of ways to give, again, right? So, reiterating some of the stuff Brian was talking about, you can just give cash, you can just swipe your credit card, there’s, again, the donor-advised fund, there’s private foundations. So, there’s big private foundations, like the Bill and Melinda  Gates Foundation. So, they give a lot. You know, there’s community foundations that you can give to. There’s all kinds of more complex strategies that we haven’t talked about today, like using trusts, and charitable remainder trusts, and all these different strategies. So why is it that we’re talking about donor-advised funds today, specifically, as a really powerful strategy?

Well, there’s a couple reasons for that. And (a) like I’ve talked about like a lot of the reasons why, like, you know, the bunching strategy, you can use it to get the deduction in the current year but then like grant out the assets over time. But you can do that with a foundation, also. But the problem is, is that like a lot of these other vehicles that you could use, like trusts, and private foundations, and all this kind of stuff, they’re a bit more complex, they can be a bit more expensive, there’s a lot of paperwork involved, and potential costs involved in them. Donor-advised funds have costs, too, but the costs are so much more minimal. So, they’re like, we accountants, we’re kind of frugal, you know, we’re looking for the cheapest way to do something. And donor-advised funds are a very cost-effective way in giving, much cheaper than setting up your own private foundation or something like that. Right? Not only that, when it comes to private foundations, there’s tax filings, there’s potentials for audits, there’s all this stuff that has to happen. You might need bookkeepers, you might need all this kind of stuff, right? So, like the costs can add up when it comes to these kinds of things. It can make sense for super wealthy people, but for the average person, maybe even fairly wealthy average people, you know, highly above average people, you know, top one-percenters, it still may not make sense, necessarily, to have your own private foundation. That might be the .001 percenters who have their own, you know, foundation. So, there’s a lot of cost savings when it comes to donor-advised funds. The ease of use, because like accountants, we want it to be quick and easy. Like we want to tell you how to do it, and then like, ‘Here, all you have to do is open this thing, fill out a couple forms, make the donation, boom, it’s done.’ Right? Because they’re busy in tax season, they don’t want to… you know, like year-end, they don’t want to be trying to set up foundations. They would rather help you set up a donor-advised fund. And then there’s the convenience of not having to do all the paperwork. The donor-advised funds do the paperwork for you. 

And it’s not just Schwab Charitable, any donor-advised funds can help you with that. I’m partial, obviously, to Schwab Charitable, but all donor-advised funds can help guide you through this process. 

So, I highly encourage you to talk with your tax advisor about donor-advised funds. And, you know, I’ve got a little example here of how it can work and how it can make sense, but I’ve kind of really, it’s just reiterating stuff I’ve already talked about. You know, when you make the donations to a donor-advised fund, it’s, again, super simple, you know, especially if it’s appreciated assets, because charities don’t want stock, they want cash. And a lot of them aren’t set up to find ways to create cash out of some of the assets, like especially if you donate cattle. They don’t want cattle, they want cash. So, like you can donate weird assets, like property, land, cattle. You know, and the donor-advised fund can switch it into cash. You can then invest that money, like, say, you want the deduction now, but you want to have that money go out little by little over time, just like how a private foundation might be would do it. You can do that; you can grant it out over time. But you end up maximizing your tax deduction this year.

So very powerful tool. I think it’s something to consider and talk with your advisor for. It’s not for everybody. Sometimes the easiest way is cash. I’m not saying you shouldn’t do that. It’s sometimes a private foundation might be the best way because it gives you the most control of how those assets are gifted, but it’s definitely something to consider. 

So now I’m going to turn it back to Brian and let him go over some of the various giving resources that we have out there that can help guide you through your decision about how to make the most of your charitable donations.

BRIAN:  Hayden, I would love to go over some resources. So, let’s jump into resources here so we can move along here and get some Q&A. I know we’ve got lot questions, too, that we’re given the group. 

So, we touched on five strategies today, and you can revisit these at your leisure in our article, Eight Year-End Charitable Giving Strategies, How to Give More While Saving More on 2022 Taxes.; You can view this article now on our website, at schwabcharitable.org/giving2022. You’ll also find a link to our site today in the webcast console that’s provided for you here on this webcast.

You can make a bigger impact with your giving by developing a comprehensive giving strategy. The Schwab Charitable Giving Guide is a new tool that helps you do just that. We developed this guide to help our donors be more strategic with their charitable giving. It can help you create giving budgets, engage your family members in your philanthropy, vet non-profits, and choose tax-smart donations. And it’s a great resource because you don’t need to be a philanthropy expert. There are explorative questions to help guide you every step of the way. We found that many donors like to explore specific topics, so we’ve created a way for you to, one, download the entire guide or you can pick and choose any of the individual topics to customize your own plan. Some of those examples are right here on the slide. Finding Your Focus. Maybe you want to learn how to involve your family in the process. Often and probably even more common now is tackling social problems. How do you do that? And as you can see, there are many more beyond those that I just listed.

This year, we’re excited to introduce our Navigating Family Philanthropy series on our website at schwabcharitable.org for families to create a positive, enduring impact with their philanthropic efforts. Purposeful decision-making is critical to success. This series of guides can help you involve family members to design a plan for meaningful, effective philanthropy. Families can use the guides to define your philanthropic purpose and we understand why you want to give. You’ll find resources to help you and your family explore the motivations, values or principles, priorities, and giving styles that make up your collective philanthropic purpose. Selecting a philanthropic vehicle or vehicles is one of the most important choices you can make to support your giving goals. Our series contains the roadmap and activities to help you identify the vehicle or vehicles that suit your family’s philanthropic needs.

As we get into giving season, we’re here to help you get started. So, visit schwabcharitable.org/giving2022 for our thought leadership articles and to see critical dates for giving to charity and contributing to a Schwab Charitable account. We have a team of experts to help make charitable planning easy. I encourage you to contact our Donor Relations team or speak to your Schwab financial consultant or wealth advisor. You can also email us, visit us online at our website, follow us on LinkedIn, and listen to our podcast. 

So, Michelle, I think what I’m going to do now is hand it over to you so that we can maybe go over some Q&A. But I want to thank everybody for their time for the presentation. Sometimes the Q&A is the best part of the presentation, though. So, I’m going to let us sit right here on this slide, and, Michelle, hand it back over to you.

MICHELLE:  Thank you, Brian and thank you Hayden. I really enjoyed listening to both of you go through the strategies, and especially how you brought them to life through scenarios and real-life examples. So, thank you for doing that. And yet we have received some great questions that I think will make it even more obvious to us. 

So let me start with you, Brian. I have a question and the question that was sent in, as well, and that is, can you tell us a little bit more about the underlying investments for the assets in the donor-advised fund accounts?

BRIAN:  Yes, I certainly can. Michelle, thanks for the question and for whoever asked that question today. The investments… you heard Hayden talk about, hey, you can contribute cash, you can contribute assets that are long-term-held. You know, I use Apple stock as an example. Sometimes people experienced at one point a great run up in Apple and they say, ‘Hey, maybe that’s what I want to contribute.’ If you’ve got what we call a core account at Schwab Charitable, you would contribute those Apple shares. You can specifically choose the lots, by the way, that you choose to move to the donor-advised fund account. Typically, what happens is Schwab Charitable then would sell those shares the next business day or the next market day. Right? So, you’re not having to work with the capital gains tax on that. We don’t have to recognize the capital gains tax as a non-profit. But then you’ve got liquid assets that you can invest. 

In our core account, we have 15 different investment pools. Each one of those pools has an underlying mutual fund. So, you’re really investing in mutual funds. We say you’re investing in pools because it’s developed in a way to where interests and dividends pay into the pool and also your administrative fee comes out of that investment pool. Of those 15, imagine this, you’ve got index funds, there’s five Schwab index funds that are available with annual operating expense ratios like .03, .04, .05. I like to say almost ETF low, as far as the pools go. There’s actively managed mutual funds. There are asset allocation mutual funds. So, if you kind of wanted to get a one-stop shop type of fund, that’s available, as well. Two socially responsible funds available, as well. And even a money market fund. It’s a fund interchangeable with pool, a money market pool. So, again, 15 choices. You can invest among and within all 15. So, you’re not just limited to, you can choose one of these 15. You could choose all of these 15 if you wanted to diversify your portfolio.

If your accounts over $250,000, your financial consultant would be able to help you identify an investment advisor that could manage those assets. In that case we call that a professionally managed account. What that means is that you’re no longer held to those 15 pools. You can have a more traditional portfolio of stocks, bonds, mutual funds, CDs, ETFs, you name it. Right? So, there are some limitations that those advisors have, and they can charge a fee at that point, as well. We put a limit at 1% annual. I found that most don’t charge that much, but we like to make sure as a fiduciary that we keep a cap on that. 

So, hopefully, that’s kind of a snapshot of how the investing works within the donor-advised fund at Schwab Charitable.

MICHELLE:  Thank you for that, Brian. And you took care of another question that we had, and that is, do we have socially responsible options? And we do. So, thank you for answering that question at the same time. 

The next two questions, I’m going to go to Hayden. And, Hayden, can you tell us are the deduction rules for contributions of cash and other assets the same? Are they different?

HAYDEN:  You know, this is where things actually get a little bit complicated. There is an entire IRS publication that goes through how the deductions work, and, in fact, there’s a worksheet that’s like two pages long that tells you how much as compared to your AGI, your adjusted gross income, how much are you allowed to deduct for a charitable donation. And it depends on not just like what kind of asset you donated. So, for example, Brian brought this up early on, cash donations currently have a 60% adjusted gross income limitation, right? Now, if you give appreciated assets, the limitation is 30%. Now, if you give cash and appreciated assets, the donation limit becomes 50%, potentially. So that, alone, is complicated based on the assets you’re giving. But what about like to the charity you’re giving? Certain charities have different limits. There’s 50% level charities, there’s 30% level charities. So, it can get rather complex as to how your deduction is going to work and whether or not you’re going to even get a deduction. So, it is something to be careful of, right?  Like lot of people think, ‘Well, I made a donation, therefore, obviously, I’m getting a deduction.’ It’s like, well, unfortunately, no, it’s not necessarily that clear cut. 

And, again, that’s why it really does matter to have a tax advisor to educate yourself on, you know, ‘Am I giving the right kind of asset to maximize my deduction?’ ‘Do I have enough income to even get the deduction?’ ‘Am I going to surpass the standard deduction?’ You know, there’s a lot of things at play here and that’s where it pays to have a conversation with at minimum your financial advisor, possibly somebody like at Schwab Charitable has got advisors who can help guide you through this process, very knowledgeable people. And it always pays to get a tax advisor involved, too.

MICHELLE:  Thank you, Hayden. And since we have you here today, can you give us a preview on what we would hear at… what is the difference between those assets are held short-term and those held long-term?

HAYDEN:  That's  a really good question. Yeah, because we talked all about those long-term assets, the assets that you’ve held for a year and a day, right? Well, what if you only held it a year or six months? You know, that’s considered short term according to the IRS, which means it’s not treated the same way. You don’t get to take a deduction for giving short-term assets like you do when you give appreciated long-term assets. But even if the asset is appreciated, it’s short term. So, you can have the same two assets, right? They both appreciated by $100,000, right? So, like, say, they’re both worth now $150,000. You originally purchased them for 50. Well, if one is short-term, it doesn’t get the same deduction as the long-term one. So, again, you got to be careful, you got to look at the timing of these kinds of transactions, because the short-term asset, what ends up happening is you only get a deduction for your cost basis. It doesn’t seem fair, right? You donated an asset that went up in value. Shouldn’t you get a deduction for the whole thing? Unfortunately, no. That’s only if it’s been held for one year and one day. 

So, if you’ve got a short-term asset that you are looking to donate, maybe you want to consider a different asset, or maybe you want to consider selling that asset first, generating the cash so that you get the full deduction. But, again, along with that comes the inefficiency of donating cash versus donating long-term appreciated assets. So, this is something to consider and have that conversation with somebody who can help guide you through that process, do the math, and figure out what’s your best option is actually going to end up being.

MICHELLE:  Excellent. Thank you. And, with that, let’s volley back over to Brian. I have a few other questions that have come in that relate to the operating of the account, itself. So, is there a minimum amount that one would need to have on the donor-advised fund?

BRIAN:  What I’m really happy to report is that there is a zero minimum necessary to open the account. Now, generally, when you open an account, you want to give to charity through that donor-advised fund, so you want to kind of be some balance. But for a long time, we had a $5,000 minimum to open a donor-advised fund balance and now there is not a minimum that’s associated with the donor-advised fund account. So, I truly appreciate that, and I know a lot of our donors do, as well. 

When it comes to minimums, though… let me just feed on that and just kind of go to the next step. If you were going to then make a gift or what we call a grant from your donor-advised fund to a charity, the minimum amount that we ask you make that grant for is $50, which is one of the lowest in the industry. And I think we’re able to do that because of the scale and size of our organization. So, I’m pretty proud of that number, as well.

MICHELLE:  That makes it very, very easy. Thank you so much for that, Brian. 

I’m going to go back to Hayden for this other question here. So, let’s suppose the hypothetical person sent in this question, that this person has taken their RMD for 2022. Can they still request additional money for this year to be directly paid by to their charity from their Schwab IRA account?

HAYDEN:  Yes, they can. So that’s a great question because there is a lot of misconception around Qualified Charitable Distributions, which is that distribution from your retirement account, and Required Minimum Distribution. So, for you to be able to use the QCD to offset A Required Minimum Distribution, you first need to do that transaction, you know, like hat transaction has to happen, literally, first. So, if you’ve already taken your RMD, then you’ve already got the money. The QCD is not going to offset the RMD anymore because you already… the first dollars that you take out of your retirement account like can’t be undone. And that’s what I was talking about planning ahead, you know, because like once you take the money out, let’s say, your Required Minimum Distribution was $100,000, and you took it out already and you still want to do another distribution for $100,000 as a QCD, you can do that, you can totally do that, it’s legal, but you won’t get it to offset your RMD. You already took your RMD. So that $100,000 can always be done, is the nice thing, even if you need to take money out of your account, as long as you meet the age requirements and so on.

MICHELLE:  Excellent. Thank you, Hayden. 

So, I think time for one question more, maybe two, that I received her. So, I go back to Brian again for this one. We talked about minimums. What about do we have a maximum amount that could be donated to a specific organization?

BRIAN:  No maximum amount, right? So, you can give away as much as you want. It’s hard to give more than you own. That’s the maximum amount. So as much as you own, that’s how much you can give. So, yeah, both giving to the donor-advised fund and when you are giving to a charity from the donor-advised fund, clearly, the max amount there is what’s in your account. So, no, that’s a blessing. No, there’s no max amount.

MICHELLE:  Fantastic. Love to hear that. And what if someone, you know, doesn’t, you know, know who they should, you know, provide any charitable contributions to? Do you all at Schwab Charitable, you know, recommend charities to give to?

BRIAN:  Such a great question. These are so many good questions that everyone is coming forward with. So, there is not a situation where we sit down, and we’ll make recommendations to you as to what charity you should gift to from your donor-advised fund account. As we were talking about the different charitable vehicles, right, private foundations came up, community foundations. That’s one plug I’ll have for a community foundation here. They do a pretty good job of sitting down talking to you about your mission, your vision, maybe holding your hand through the process, and even introducing you to local charities because they’ve got relationships with local charities.

With a national donor-advised fund account, we are agnostic as to who you give to as long as it is an authentic 501(c)(3) organization. And I like to say, also, that it’s not under state or federal investigation, and going through save you from that trouble and also limit our risk in those situations. Other than that, though, you can give to who you’d like to. 

What I’ll add that’s really important is on our website there is a portion on some sort of something that could end up being problematic. We want to our website that will share, I believe it’s six different industry-leading search engines, like Charity Watchdog and GuideStar, Candid, I guess, now is the name, and others that would allow you to go in, and they’ve all got a slightly different format, that will allow you to search for your favorite charity, starting with your cause and things that are important to you, to help you find the charity that’s important to you. So that’s the way we go about it here at Schwab Charitable.

MICHELLE:  Excellent, Very, very helpful. Thank you for sharing that, Brian. 

And, wow, I’m looking at the clock here. We have a minute to close. So, unfortunately, we’ve run out of time for more questions.

So, once again, I’d like to thank, first of all, of our attendees here on the webcast today. Thank you for joining us on this important conversation. And I especially also want to thank, you know, Hayden Adams and Brian Howell for sharing their expertise and their experience and bringing this to life through the examples.

I hope everyone will join us on Giving Tuesday, which, once again, is November 29th, and, you know, have the opportunity to recognize the charity or charities of your choice. And watch how those contributions and those, you know, make a difference, and really see how those contributions will help to make impact in this world. So, we thank you in advance for everything you’ll be doing.

So, this concludes our presentation here today, this webcast. I wish all of you a great afternoon, great day. Stay safe, and we look forward to speaking with you again. Thanks, everyone.

BRIAN:  Thank you.