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Military Finances 301: Tax Efficient Support to Charity Thumbnail

Military Finances 301: Tax Efficient Support to Charity


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

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