Financial Planning – 3 Tricks To Get The MAXIMUM Tax Benefits From Your Charitable Donations with Garrett Prom, CFP®, CRPC®, EA

Garrett Prom is founder of Prominent Financial Planning located in Austin, TX and serves clients nationwide. He is a CERTIFIED FINANCIAL PLANNER and an Enrolled Agent, the combo which allows him to give both investment and tax advice.

Garrett has been featured in numerous publications including The New York Times, Money Magazine, Investopedia, US News and World Report and the and USA Today to name a few. He has also been recognized as one of the top financial advisors for millennials by Money Under 30. He specializes in assisting clients through the accumulation stage of life so all of his clients are either Generation Xers or Millennials. Charitable giving is important to him and many of his clients which is why he often recommends unique tax-advantaged approaches to giving like the ideas he will talk about today.

In this interview you will learn…

  • Gifting appreciated investments
  • Deducting cash donations
  • The PEASE limitation isn’t what you think it is
  • Gifting directly from your IRA

Interview Synopsis

Most importantly, Garrett insists that he is not trying to convince anyone to give.  We all have our own ways of making a difference, and yours might not be through financial means.  However, if you already give or if you want to start, Garrett simply wants to make sure that you reap the benefits of giving through tax implications and tax benefits.

The best way to give charitably is through appreciated assets such as stocks, mutual funds, ETFs, etc.  Specifically, gift those assets that have increased in value since the time you purchased them.  When these assets grow in value, you owe what’s called a capital gains tax, which is usually close to 15% upon the sale of the asset for cash.  However, if you gift the actual asset instead of the cash, you can deduct the amount completely from your taxes in the form of a charitable contribution.  Furthermore, the charity/nonprofit/church can then sell the asset without paying taxes due to its nonprofit status.  Garrett strongly recommends taking this strategy only for assets that have appreciated in value.  Never gift assets that have lost money.

Unfortunately, the IRS does cap the amount you can claim as charitable contribution on your tax form—usually 50% of your adjusted gross income.  However, if you gift more than the allowed deductible amount, the difference can be carried over and added as a charitable contribution at any point within the next 5 years, as long as you don’t go over 50% in that year.

The government forces you to withdraw money from your IRA at the age of 70 1/2, called a Required Minimum Distribution (RMD).  These distributions increase your adjusted gross income, which counts as an itemized deduction.  When you gift to a charity from your IRA, this amount—capped at $100,000—counts both as an itemized deduction and your RMD. 

To maximize your tax benefits, gift appreciated assets instead of cash.  This rewards you in a sense and allows you more money for future donations.  While the IRS caps your tax deductible amount at 50% of your adjusted gross income, donations can be carried over up to 5 years.  If you exceed the 50% cap, make a note of the donation and apply it to a later tax form.  Finally, to counteract your RMD, once you reach 70 1/2 gift out of your IRA first.  These tips and tricks will allow you to maximize the impact your money has on those in need.