Giving with Impact:

MICHAEL GORDON VOSS:

Welcome to season three of Giving with Impact, an original podcast series from Stanford Social Innovation Review, developed with the support of Schwab Charitable. I'm your host, Michael Gordon Voss, Publisher of SSIR. In this series, we strive to create a collaborative space for leading voices from across the philanthropic ecosystem, to engage in both practical and aspirational conversations around relevant topics, at the heart of achieving more effective philanthropy.

The vast majority of US donors don't give to charities simply to get a tax benefit, they give because they genuinely care about the work of the organizations that they support and want to see those organizations succeed and make a difference in the world. But it is also true that tax law in the United States can have an impact on the volume and type of gifts that donors may choose to make. And while there may be truth to the old adage about death and taxes, as far as we know, only one of those two is immutable. So how does current US tax law affect charitable giving? And how might those laws change over the next several years? Are there ways that donors should be approaching their giving strategies to maximize the amount of money getting into charitable organizations? And what do these policies and strategies mean for the non-profits who depend on this support?

To share some insight on these questions, and help donors and non-profits think through the impact of tax policies on charitable funding, we're joined today by two individuals with a wealth of knowledge, pun intended, on US tax policy and donor strategy.

Mike Townsend is Managing Director, Legislative and Regulatory Affairs for Charles Schwab and Company. With more than 27 years of Washington experience, Mike is Schwab's Washington-based political analyst, studying legislative, regulatory, and political developments to determine how they might affect individual investors, retirement plan participants, and investment advisors. Mike is the host of Schwab's WashingtonWise Investor podcast and is a featured speaker at dozens of financial industry events each year. Prior to joining Schwab in 2000, Mike worked at Powell Tate, Inc., a Washington, D.C., public affairs firm, and previously worked for two US senators from Maine.

Returning to the podcast is Hayden Adams, Director of Tax and Financial Planning at the Schwab Center for Financial Research. In his role, Hayden provides analysis and insights on topics including income tax planning, tax-smart investing, asset allocation, and retirement strategies for a range of Schwab clients and advisors. Hayden previously led Schwab's tax compliance function and served as Schwab's lead representative on tax regulatory matters. Prior to joining Schwab in 2015, Hayden worked for eight years at the IRS as a senior auditor.

Mike, Hayden, thank you both for joining me today as we explore the current and possible tax policy environment here in the US, and what that means for donors and non-profits alike. Let's get started.

Mike, I'd like to start by asking you how you would characterize the current tax environment from a giving perspective, is the current tax policy one that you would say is favorable for giving or encourages donors to be more generous? And, if so, why do you think that?

MIKE TOWNSEND:

Hey, Michael, thank you so much for the opportunity to be with you today, it's great to be here. You know, I think, first of all, even before you get to the tax implications, it's a great time to be giving, partly, because I think there's just such a huge awareness of the need out there and of the important role that charitable organizations are taking during the pandemic, helping people who may have lost their job, and that sort of thing. So I think the environment is really good right now, in terms of just the knowledge and awareness. And then on the tax side, there's no question that 2021 is a good year for giving. Two of the key charitable giving-related provisions of last year's CARES Act, the COVID-19 relief package that was approved in late March of 2020, were extended for 2021. One is the $300, above-the-line charitable deduction for non-itemizers, which is $600 for couples. And the other is that for 2021, individual taxpayers who do itemize their deductions can deduct up to 100% of their adjusted gross income for cash contributions to a public charity. That's usually capped at 60%, but it was increased for 2020 and 2021, to help encourage giving during the Coronavirus crisis. That provision expires at the end of this year. So I think those are two big tax incentives for charitable giving this year.

MICHAEL:

And, Hayden, Mike just discussed this tax environment, but as anyone who has listened to the podcast before knows, not all giving is the same.

Other than appreciated non-cash assets, which we've often discussed, what are some things that donors should think about to increase the benefit of their giving?

HAYDEN ADAMS:

Well, first, thanks for having me back on your show. As you mentioned, giving appreciated assets is probably one of the most tax-efficient ways to make donations, but there are many other ways to give. For example, one of the ones we talk about a lot is concentrated giving, or a lot of people call it bunching your gifts together. In this methodology, what you do is you take the standard deduction, one-year, and then you concentrate your gifts into another year, so that you can qualify for the itemized deduction, because the itemized deduction is pretty high now, a lot of people aren't able to itemize like they used to in the past. So the idea behind this is, is that, basically, alternate between concentrating those gifts, taking the itemized deduction, and then the next year, taking the standard deduction. There can be a lot of benefit to that when you properly utilize this methodology.

The next method that I recommend to a lot of people who are retired is qualified charitable distributions, we call them QCDs. Basically, you're making a gift, directly from your retirement account right to a charity. This is a very powerful method because you don't have to take that money into your income if you make this kind of a gift using the QCD.

And, finally, you can always just give cash, you can cut a check or use your credit card to make donations.

Now, in addition to how you make the donations, there's different vehicles and different methods you can use when it comes to donating. You can donate, again, directly to that charity. You can use a donor-advised fund to make your gifts, so that you can give the gift to the donor-advised fund, get your deduction, and grant that money out, or you can even use your own private foundation.

MICHAEL:

So Hayden, Mike mentioned a few moments ago, some of the specific provisions in the CARES act that are carrying forward. Are there any additional considerations for donors regarding these?

HAYDEN:

Yeah, there definitely is when it comes to that 100% donation deduction. It's very tempting. I mean, who doesn't want to pay zero tax, because that's basically what this is allowing? Because if you gave enough money to meet the 100% AGI donation deduction, what you're basically saying is, 'I'm giving enough to wipe out my adjusted gross income,' which means you have no taxable income, which means you pay a zero tax.

Now, as tempting as that is, it may not be the best option for a lot of individuals. And I did some calculations and wrote an article about this in the past. And to kind of summarize that, let's say you've got a million dollars of income or something like that. In that case, they wipe out the highest tax bracket, the 37%, the 35%, and the 32%, when they make a 100% donation deduction of their adjusted gross income. However, they also wipe out the lowest tax brackets, the 10%, the 12%, and so on.

Now, the way you figure out your benefit from any gift is you take whatever the gift amount is, what tax bracket it's wiping out, and you multiplied by that tax rate. So if you're wiping out all the tax brackets, well, it's great when you're out the 37%, and 32, and so on, but you're only getting a 10- or 12% tax benefit when you wipe out those lowest tax brackets. So you're not maximizing the tax benefits of that charitable donation.

Now, what a lot of people might want to consider, rather than taking the deduction in one year, what you do is you take the deduction over two years, and that way you end up maximizing the tax benefits. Even though you're giving them that one year, what do you do is you just use the normal deduction limits. Let's say, for this example, the person's limit is 60% of their adjusted gross income. What they would do then is if they donated a 100% of their money, they would take only 60% of the deduction in the first year. That would wipe out, potentially, all the highest tax brackets for them, those 30% tax brackets. Then they carry over the rest of the donation to the next year and deduct it in the following year. And, again, they wipe out those highest tax brackets and still get the benefit of having those low taxes, like the 10- and 12% tax brackets. So, overall, it maximizes the deduction over that two-year period, provides the person with a much better tax benefit than sometimes taking the deduction in one year and totally wiping out all of your taxes.

Now, there are some individuals that it could be beneficial to use this 100% deduction, and that would be... like the one that jumps to my mind is say, you're selling a business, and you have to recognize a huge amount of income, or maybe you had a giant windfall in a single year, like you've won the lottery or something like that. Well, in that case, yes, maybe that would be a good opportunity to use the 100% donation deduction because you're probably going to have a huge amount of income one year and you may not have that huge amount of income the next year. So that's the individuals who might want to consider that large donation deduction for 2021.

MICHAEL:

Yeah, and regardless of whether you do take the 100% in the first year or spread it as you've discussed, you know, in the end, it means there's more money for you to eventually give to the charitable causes that you support, which is really what I think we're all trying to get to, at the end.

Mike, let me turn it back to you for a second. You know, while tax policy, itself, may not always be constant, debates on tax policy seem to be. What can you tell us about any of the proposals, currently, being discussed or considered?

MIKE:

Congress, right now, is currently in the process of developing a massive $3.5 trillion spending proposal that would include many of the President's key policy priorities, issues like climate change, healthcare, social programs, like free community college and universal pre-kindergarten, and much more.

That amount of spending needs to be offset with provisions that will raise revenues for the Treasury's coffers, which is a fancy way of saying tax increases. Earlier this year, the President outlined four main proposals—increasing the corporate tax rate, returning the top individual income tax rate to 39.6%, taxing capital gains as ordinary income for the wealthiest taxpayers, those with more than $1 million in income, and ending the step up in basis for inherited assets.

Now, just because the President proposed these, does not mean that Congress will include them in the legislation. There's a lot of negotiation that is still to be done. And, of course, Congress can, and likely will, include other Tax Code changes in its final package. So we're still waiting to see exactly what the details are going to be, but there are a number of ideas that are on the table.

MICHAEL:

And, Mike, because you're in D.C. and so close to these discussions, of all of those proposals, which do you think have the potential to pass, and which do you think might have the greatest impact on charitable giving, and why?

MIKE:

Well, Michael, I think the two most likely to happen are a modest increase in the corporate tax rate and returning that top individual income tax rate back to 39.6%, which is what it was prior to 2017. These provisions seem to have the broadest support among Democrats. And since this bill was likely to receive little or no Republican support, broad support among Democrats is going to be critical.

What will have an impact on charitable giving is an interesting question. And I think it's the other two proposals I mentioned, that really could have an impact on charitable giving. Increasing the capital gains tax rate could actually increase charitable giving, since donors can gift appreciated stock without paying the capital gains tax that will be triggered if they sold the stock and then made a cash gift. After the 2013 tax law that increased the top capital gains rate, charitable giving increased by more than 4%.

MIKE:

I'll also be watching what Congress does with regard to the estate tax. The changes that are being contemplated could discourage generational wealth transfers and encourage more people to give to charity during their lifetime, rather than pass that money, and what could be significant tax consequences to their heirs.

But I think it's really important to remind everyone that we do not know yet, exactly, what will end up in the final bill. I expect there will be a lot of changes, a lot of negotiations, horse trading that will go on in Congress over the next couple of months. Some of what I described may come to pass, some that may not. We're just going to need to wait and see.

MICHAEL:

Hayden, I mentioned in your intro that among your areas of expertise is retirement strategies. And Mike was also just mentioning that there could be changes to the estate tax. You mentioned QCDs as a tax-advantaged way to give retirement assets to charities. Talk to us a little bit about the ways that retirement assets can fund tax-smart giving.

HAYDEN:

Yeah, a QCD is that qualified charitable distribution. It can be a great method for many retirees to make gifts. So, basically, to do a qualified charitable distribution, you need to be over the age of 70-1/2, and then you can give up to $100,000 directly to the charity of your choice, and then you never have to take that money into your income.

Now, many people... there was a lot of confusion recently when it comes to QCDs, because a lot of people know that the required minimum distribution rules and QCDs were very closely connected, but they changed the rules recently when it comes to required minimum distributions. Now, the age is not 70-1/2, it's 72 for those. And so a lot of people are thinking like, 'Oh, that means I can't do a QCD until I turned 72.'

HAYDEN:

That's not the case, the age for QCDs is still 70-1/2. So you don't have to wait until you're 72 to make some of these gifts.

Now, the benefit to a QCD is that it allows you to keep that money from coming into your income. If you're concerned that your RMD is going to be very high, and that you could potentially be bumped into a higher tax bracket, well, a QCD might be a great option for you to either wipe out or take out some of the RMD that you have to take, and that way, you don't have to worry about your taxes increasing. And if you don't need that money to live on, maybe you've got other assets, well, then, it can be a great option.

So, for instance, let's say, you've got an individual who is 72 years old, and they've got an RMD requirement of $120,000. Well, maybe they don't even need that money to live on. Maybe they're getting enough dividends and interest, and have other sources of income, perhaps they own a business that they still operate. So they don't really want to take that $120,000 in income, they just don't need it. And if this person is charitably inclined, a great option for them is to use that qualified charitable distribution. They can take $100,000 of that 120 RMD that they're supposed to take, they can give the 100,000 directly to a charity, it never gets taken to their income, so, really, they only end up having to recognize $20,000 of that income, which, hopefully, you know, it doesn't bump them into a higher tax bracket or something along those lines.

Now, there are a few things that people need to consider when they are thinking about a QCD. First and foremost, is, is that you have to make the gift directly to the charity. You can't take that money, first, distribute it to yourself, put it in your bank account, and then make the gift to the charity. If you do that, what ends up happening is you have to recognize all that RMD as income, and then you'd have to take an itemized deduction in that case.

Now, that sounds like it's the same thing, like there wouldn't be a big difference between doing that way versus giving the money directly to the charity from your IRA account. Well, the problem is, is that it can affect other things, like your Medicare benefits, it can affect your Social Security taxation. It's generally better to use the QCD than to take that RMD into your income first.

And you have to give the money directly to an operating charity. You can't give that money in a QCD to your private foundation, and you can't give it to a donor-advised fund.

Now, in the end, the best method for doing this, it's really individualized. You have to do some math to figure out, 'Okay, where's the best method? Should I give appreciated assets? Should I do a qualified charitable distribution?' I highly encourage people who are thinking of utilizing any of these strategies to meet with a tax and giving professional to help them figure out which one is going to be the best option for the gift in order to maximize my charitable deduction.

MICHAEL:

Hayden, whether it's retirement assets or other types of giving, what, if anything, do these different approaches mean for the non-profits? Do non-profit leaders or do development officers working at non-profits need to do something different to maximize the benefit of these different donor strategies?

HAYDEN:

What I encourage non-for-profits to do is to work with their clients to figure out what is the best gifting method for that individual's particular situation. By doing so, it relieves a lot of the headaches and a lot of the concerns that a lot of donors might have, and it makes it just easier for them to give.

MICHAEL:

Mike, as we start wrapping up today, any final thoughts that you want to share with the listeners?

MIKE:

I think it's important to remember, you don't make all your charitable decisions based on taxes. And I think one of the things that's going on right now is a lot of uncertainty about exactly what tax changes are potentially coming down the pike and could be, potentially, in play for 2022. So, we don't know the answers to that yet, so I think you want to make your… your decisions without overthinking, exactly, what changes might come down from Congress when it comes to taxes and potential tax increases. So I think you want to give places that you feel are doing worthy efforts and causes that you care about, and taxes is an important consideration, but it shouldn't be the only consideration.

MICHAEL:

Exactly. Well, listen, Mike, Hayden, thank you both for your time today. Tax policy and its implication might not always be the easiest topic of conversation, but it's certainly an incredibly important one. And I think you've both done a great job of making it more understandable and interesting for our audience.

Thank you for listening. We hope you've enjoyed this episode. Please consider leaving us a review on Apple Podcast or your favorite listening app, as it helps others discover the show.

We encourage you to listen to other episodes in this series, as well as other podcasts from SSIR. This podcast series is made possible with the support of Schwab Charitable, who played an important role in the selection of topics and speakers. For important disclosures and a transcript of this episode, visit schwabcharitable.org/impactpodcast.