facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Military Finances 301: Tax Efficient Support to Charity Thumbnail

Military Finances 301: Tax Efficient Support to Charity

Taxes

Throughout most my career, I made a contribution to CFC via monthly payroll deductions. That was perhaps the most tax in-efficient way to support charity. During the COVID-19 event, you might want to "stroke a check" to your favorite charity. That is a noble idea and a good thing to do. But, you might be able to do so in a more tax efficient  manner.

Gift Appreciated Assets

I've found that a lot of military senior military officers and NCOs are great buy and hold investors. The down side of that is that you end up with a lot of capital gains built up in those assets you've been holding. The tax load to get to that money is, quite frankly, a little more than scary. So you hold them. But what if you could get rid of the gains without paying taxes?

You can avoid capital gains taxes by gifting the appreciated assets (stocks, bonds, mutual funds, ETFs, etc) to a charity. And, as long as you've held the assets for more than a year, you get to deduct the Fair Market Value (FMV) on the date of the gift. So, instead of giving the charity you want to support cash, give them appreciated assets equal to the amount of cash you were going to give. You deduct the FMV, the charity "inherits" the capital gains and since the charity is tax exempt, they don't pay taxes on the gains either (and you get to "stick it" to the IRS). You can even take the cash you were going to give to the charity and buy the same securities you just gifted. You'll have the same value in the asset, but your basis will be "stepped up" to the current FMV. You win. The charity wins.

Use Qualified Charitable Distributions (QCD)

If you (or your parents) are 70 1/2 or older, you can make direct contributions from your IRA to a charity. The distribution is reported, but it isn't included in taxable income or Adjusted Gross Income (AGI). This can have a couple of good effects for you. First, many who are 70 1/2 don't have a mortgage and don't pay a lot in state and local taxes. So, they don't itemize. If you don't itemize you don't get a tax benefit for charitable contributions. 

Second, the QCD reduces or doesn't affect your AGI and AGI is the most important number on your tax return. The amount of other deductions and credits are based on AGI. Some examples include medical expenses which can only be deducted if they exceed 7.5% (or 10% in some years) of AGI; the American Opportunity Credit phases out between $160,000 and $180,000 of AGI (Married Filing Jointly); and while not a tax, Medicare premiums are based on AGI, with the first increase starting at $170,000 AGI (again MFJ).

Bunch Deductions

Under the Tax Cuts and Jobs Act (TCJA) the standard deduction was essentially doubled for all taxpayers. This means that, potentially at least, your deductible charitable deductions have less impact on your tax bill. So you might want to take the standard deduction one year and then make a "double" contribution the other year. 

For example, you routinely give cash to a local food bank. You realize that this year is especially challenging for the food bank. You then speak with the charity and tell them you're going give them a double contribution this year, but won't be supporting next year. But you'll be back the following year. There is a pretty good chance you'll increase your two-year total deductions and you'll help the charity when they really need it.

Military Finances are Different

While a lot of things in finances are the same for military members as civilians, there area also a lot that are really different. If you're going to work with a Financial Advisor, we think you should work with one that eats and breathes those differences every day. Give us a call if you would like to chat.

If you found this article useful, you might like the following blog posts:

How Military Officers Can Avoid Charity Scams


Military Finances 101: What Is the Difference Between a Tax Credit and Tax Deduction?


Military Finances 301: The Potential Tax Tripwire When You Refinance Your Mortgage




Disclaimer
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.