By Tyrel Lacey, CFP ®, ChFC®
I have the opportunity to work with residents on Whidbey Island and while location is a common thread, I have found they enjoy creativity and embracing their local community. There is also something else I have noticed that connects them: they are very charitably inclined. And while they have an incredible impact-focused mentality, it got me thinking about how others can make an impact when opportunities to volunteer and give back looked so differently in 2020. 30 percent of annual giving happens in December, but what if you could make an impact all year long? The first step is to have your advisor look at your portfolio.
ESG Investments
Many of my clients have Environmental, Social, and Corporate Governance (ESG)[1] investments. ESG investing is a form of sustainable investing that considers an investment’s financial returns and its overall impact on the world around us. An investment’s ESG score measures the sustainability of an investment in three specific categories: environmental, social and corporate governance. If all your investments fall under that umbrella, you are not investing in things that can be bad for the earth like defense, oil or gas.
Over time, your investments can make a big impact. If one of your core values is to be environmentally or socially responsible, and you are not sure what current positions you hold, a decent amount can be in areas that might not align with your values. Have an advisor look at your current portfolio to see if it is environmentally friendly. Otherwise, you could be contributing millions of dollars in your lifetime to companies or causes that are not aligned with your values.
Qualified Charitable Distributions (QCD)
For those who are interested in contributing their dollars a little closer to home, utilizing gifting from your IRA is a good place to start.
If you are looking to make a charitable donation and you are over 70.5, your IRA is a tax-friendly place to pull from through a vehicle that is called a Qualified Charitable Distributions (QCD)[2]. Usually, a distribution from your IRA is taxed as income. However, when done correctly, you can gift directly from your IRA to a charity and in turn, avoid paying income tax. This could be a national charity or even your church or local food bank, as long as the charity is a qualified 501(c)3 organization. For those needing to take Required Minimum Distributions (RMDs) from your IRA annually, you can gift a portion of that designated dollar amount. Essentially, it is gifting out of your IRA with no income taxes associated to you or the charity accepting the donation.
While it sounds simple enough, there are a number of rules established by the IRS to ensure qualified charitable distributions are made properly.
At a glance, they are:
- You cannot also claim the donation as a deduction on your tax return.
- The donation must be validated by the charity stating no goods or services were exchanged for the contribution.
- Specific filing requirements must be met when reporting the QCD.
To put it simply, a QCD can be a great vehicle to make charitable donations, but in order to make sure you do it properly, be sure to speak with your advisor and tax professional before you make any changes or withdrawals.
Donor Advised Fund
Lastly, I would be remiss not to mention a way for clients to maximize charitable donations through a donor-advised fund[3] (DAF) and appreciated stock.
If you are facing a larger than normal tax bill due to capital gains from selling a property or business, a donor-advised fund is one way to help offset one year of high taxes and still allows for you to make charitable donations over time. It is a vehicle that holds on to your charitable distribution all at once and then it is up to your discretion how you deploy the donations in later years. Donor-advised fund holders enjoy a federal income tax deduction of up to 50 percent of adjusted gross income for cash contributions, and up to 30 percent of adjusted gross income for the appreciated securities they donate.
You can also gift appreciated securities to donor advised funds which allows you to avoid paying capital gains in the future on those appreciated shares. A DAF is a great tool that allows for a twofold tax benefit when funded by appreciated securities.
According to a study released by Giving USA[4], nonprofits are coming to rely more on donor-advised funds. In the first four months of 2020, donor-advised funds contributions had increased from the previous year by 18 percent with more than $236 million of those dollars going to charities combating the COVID-19 crisis.
With so much happening globally and each person being impacted in different ways, charitable giving is even more important. If you are able, willing, and interested in setting up a donor-advised fund, plan to give from your IRA, or want to make a global impact with ESG investments, talk to your advisor today about Impact Investing. And most importantly, don’t forget you can make a difference year-round.
Any opinions are those of Tyrel Lacey, CFP ®, ChFC® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor toassess your situation.
[1] ESG Investing: A Beginner’s Guide
