Clients want to know: What’s deductible and what’s not?

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Clients want to know: What’s deductible and what’s not?

Whether you are an estate planning attorney, financial advisor, or accountant, you’ve probably seen an uptick in client questions about tax deductions–and tax rules in general–over the last few years. Tax law changes at the end of 2017 have caused a lot of ongoing taxpayer confusion.

To be sure, your clients will be asking about charitable tax deductions as year-end rolls around. As an advisor, you’re already working with clients on financial and tax planning all year long, but fall is the time when many clients buckle down. Whether it’s the change in the weather or the imminent end of the calendar or tax year, autumn is a time to reassess things like tax loss harvesting and charitable giving. These are just two of many types of transactions that result in deductions when tax returns are filed in the spring.

Charitable giving may be especially high on the planning radar right now because of the many national fundraising initiatives that kick into gear this time of year. You (and your clients) have probably noticed that many different types of causes are celebrated each and every month. October, in health-related charities alone, is National ADHD Awareness Month, National Down Syndrome Awareness Month, Pregnancy and Infant Loss Awareness Month, Spina Bifida Awareness Month, National Physical Therapy Month, and likely many more.

Make sure your clients are aware that there are specific parameters around tax deductibility before they respond to requests from organizations and even their friends and family members who support these organizations. Your clients are relying on you as an advisor to stay on top of the rules, including:

–Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt–a status for which an organization must seek IRS approval.

–Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.

–Furthermore, even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt.

–To qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, for example, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.

–No doubt, many of your clients not only support 501(c)(3) charities, but also social welfare groups organized under Section 501(c)(4). Examples of social welfare groups include neighborhood associations, veterans organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veterans organizations).

–Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible.

If you have any questions about the tax deductibility of your clients’ contributions to various organizations, please reach out to the team at The Community Foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules.

 

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Do good, feel better: Philanthropy through the lens of well-being

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Do good, feel better: Philanthropy through the lens of well-being

Philanthropy means “love of humanity”—and, according to some, “philanthropy” includes acts that benefit both the giver and the receiver. This is surprising to some people who have been taught “it’s better to give than to receive.”

Somehow we have popularized the idea that giving should “hurt.” But that is not what the research says. Consider just a few examples:

–Research on the connection between volunteering and hypertension revealed that four hours of volunteering a week reduced the risk of high blood pressure–by 40%–in adults over 50.

–Another study indicates that giving reduces cortisol levels.

–Yet another study found a link between unselfishness and a lower risk of early death because “helping others” reduces stress-related mortality.

–Research has linked doing something good for someone else to an increase in endorphins.

–An altruistic attitude in the workplace makes you more productive and less likely to quit.

–Doing good and being grateful helps you sleep better at night.

–People who do just one good thing a week for someone else actually become happier over time.

 

When people were asked to reflect about all the ways they do good (giving to charity, volunteering, serving on boards, donating canned goods, purchasing products that support a cause, celebrating at community events, sharing with others, and so on), 92% reported that they felt better about themselves.

Even just thinking about what you’ve given others–and not only just being grateful for what you’ve received–is a huge motivator to do good things for others, over and over again.

The “do good feel good” benefits of philanthropy is just one of the many reasons that so many individuals and families work with The Community Foundation. If you’ve already established a donor-advised or other type of fund with The Community Foundation, we look forward to continuing to help you fulfill your charitable wishes to improve the lives of others. If you’ve not yet established a fund at The Community Foundation, we look forward to working with you to make a difference in the causes you care about.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Fourth quarter jitters: Charitable giving tips to reduce your stress

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Fourth quarter jitters: Charitable giving tips to reduce your stress

You are not alone if you begin to feel a little anxious when October rolls around. Many people experience year-end stress, whether because of looming deadlines at work, tax-related estate planning cut-off dates, anticipating a busy holiday season of travel and social engagements, or simply the realization that another year is coming to a close and there’s not a lot of time left to check off items on the 2023 punch list.

To top it all off, many families do a lot of their charitable giving at year end, too. But that’s one area that does not need to be stressful. Your giving can be more easily accomplished than sending invitations, herding family members, guessing colors or sizes, and remembering who to include–or not!

Here are three tips for alleviating fourth-quarter stress and still be able to hit your charitable goals for 2023.

–Using your donor-advised fund at The Community Foundation makes giving very convenient. Through the foundation’s online portal, you can easily view a list of all of the organizations you’ve supported so far this year, make note of the ones you missed or want to add, and then finish the annual task.

–Your late-year timing could actually be useful for the organizations you care about, given the pronounced need for support during the gift-giving time of year, whether that’s to an organization seeking to achieve its own year-end goals or an organization that provides food or utility bill relief during the cold winter months. According to National Giving Month, 31% of charitable giving occurs in December; 12% of giving typically occurs between December 29 and 31; and 28% of nonprofits raise as much as 50% of their funding in December.

–Charitable needs are heightened during the fourth quarter because it is especially stressful for people experiencing financial challenges. For 52% of respondents surveyed in a 2023 study, money was the most cited factor that negatively affects their mental health, a level 25% higher than a year ago. The organizations supporting these people are in high gear during the fourth quarter and holiday season.

–By the end of the year, you will likely have a better idea of your financial situation, ideal target amount for charitable tax deductions, and the performance of stock in your portfolio. This will allow you to make gifts to your donor-advised fund of highly-appreciated stock, avoid capital gains, and reduce your taxable estate. And, of course, the proceeds of that stock will hit your donor-advised fund tax free, so the full amount of the sale price is available to support your charitable giving priorities.

Completing your 2023 charitable giving can reinforce philanthropy’s win-win value proposition: You can check a task off your list by supporting causes and organizations that are important to you and receive key tax benefits, and those in need will appreciate your generosity while feeling a greater sense of the season’s spirit.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Retirement strategies

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Retirement strategies: Tax benefits and beyond

At The Community Foundation, we regularly talk with retirement-age donors and fund holders about the tax benefits of Qualified Charitable Distributions and leaving bequests of IRAs to a donor-advised fund at The Community Foundation. But getting involved in philanthropy can be so much more than that for retirees and people who are gearing up (or down!) for retirement. This is particularly relevant as some retirees consider returning to work and contemplate what that means for their charitable giving and volunteering plans.

You’ve likely heard the statistic that 10,000 people in the United States are turning 65 every day. And while 65 may be the “traditional” retirement age in this country, the milestone appears to be anything but traditional nowadays. While Covid-19 did not impact retirement ages as much as some might have predicted, many of those who did retire actually now regret it. While many retirees are seeking work for financial reasons, two of the top six reasons to go back to work involve boredom or loneliness.

For people who’ve reached a theoretical retirement age, working or returning to work provides many opportunities that tie into philanthropy. For example:

–You can still contribute to your IRAs (which many people do not realize), and if there’s an employer-sponsored 401(k) plan, all the better.

–You can use your extra income to fund your donor-advised fund at The Community Foundation, making you eligible for an income tax deduction as well as removing assets from your taxable estate.

–As you take advantage of the opportunity to get more involved with causes you care about in your free time (which has perhaps increased because children have grown), you can update your estate plan to leave additional bequests to your donor-advised fund at The Community Foundation to support your favorite causes after you’re gone.

–And of course, if you are 70 ½ or older, you can take advantage of the Qualified Charitable Distribution (QCD) which allows you to direct up to $100,000 annually from your IRA to a qualified charity, and even more in future years as the $100,000 cap is indexed for inflation. Plus, if you’ve reached the age when you are required to take distributions from your IRAs, QCDs will offset those Required Minimum Distributions (RMDs).

For those who’ve retired for good, remember that many of the organizations you care about could likely use your help not only financially as a donor, but also as a volunteer, board member, or community advocate.

Please reach out to the team at The Community Foundation. We’d love to work with you on your charitable giving plans for retirement, un-retirement, or re-retirement, as the case may be! Your seasoned professional skills and civic commitment are truly valuable to improve the quality of life in our community.

 

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

For clients who may sell a business, the time to think charitably is right now

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For clients who may sell a business, the time to think charitably is right now

Business owners who’ve enjoyed summertime’s more relaxed energy can deservedly daydream about the “extended vacation” that comes with selling the business!

While it all sounds good, business brokers will tell you that many business owners fail to optimize—and they sometimes even compromise—the value of their business’s proceeds by rushing the process, hastily determining an asking price, or not fully assessing the value of their business to a potential buyer. In their haste, owners often miss strategies that can deliver an improved post-sale result and a true reward for their years of work.

The Community Foundation can be a valuable resource as you guide a business owner client through a pre-sale preparation process. This is especially true for a business that has operated for many years and has accumulated significant unrealized capital gains in its valuation that are likely to be heavily taxed at the time of the sale.

Many closely-held business owners and their advisors may not be fully aware of the advantages of giving shares to a donor-advised fund at The Community Foundation well in advance of any external discussion about a potential sale of the business. With prudent planning, the gifted shares will be free of capital gains at sale time, allowing the proceeds to flow into the donor-advised fund, ready to be deployed to meet the business owner’s charitable goals. The business owner also benefits because they’ve reduced the value of their taxable estate. This can have huge repercussions given the anticipated reduction of the estate tax exemption slated for 2025.

Remember that it will be important to secure a proper valuation of the business at the time the business owner makes a gift of shares in order to comply with IRS requirements for documenting the value of the charitable deduction.

Critically important to successfully executing this strategy is to ensure that your client avoids even any preliminary discussions about sale, let alone negotiations, before consulting with advisors, including looping in The Community Foundation early on. Otherwise, your client might get caught in the IRS’s step-transaction trap, a risk with any pre-sale gift to charity of real estate, closely-held stock, or other alternative asset. Definitely, the devil is in the details!

By the way, if you routinely advise owners of closely-held businesses, and if you like to go deep into tax law, you might enjoy reviewing the issues related to the business itself supporting charitable causes, totally unrelated to its eventual sale.

Please reach out to The Community Foundation team if a business owner client would like to explore the idea of potentially giving a portion of the business to a donor-advised fund or other type of fund at The Community Foundation. We can work alongside you and the client to help optimize the exit and maximize the resulting proceeds.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Relief from catch-up requirements: More money for charitable giving?

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Relief from catch-up requirements: More money for charitable giving?

Legislation known as SECURE 2.0 contained a dizzying array of changes to the laws governing retirement plans. Passed at the end of 2022, SECURE 2.0 is 130 pages long; overall, its purpose is to encourage more retirement savings through vehicles like employer-sponsored 401(k) plans.

Lately, the buzz around SECURE 2.0 has been focused on a very specific provision addressing what are known as 401(k) “catch up” contributions. A “catch up” contribution allows a worker aged 50 and older to pump more money (an extra $7500 in 2023) into their 401(k) plans, beyond the usual $22,500 statutory maximum for employee deferrals.

Normally, an employee’s contributions to a 401(k) are not included in adjusted gross income for tax purposes, which is a big perk. But under the provisions of SECURE 2.0, if you are at least 50 years old and earned $145,000 or more in the previous year, these catch-up contributions would be treated like Roth IRA contributions–meaning the money used to make those contributions is after tax. Essentially, you will be paying tax on the money you use to make the catch up contributions. Depending on your tax bracket, the extra tax could possibly tally into the thousands of dollars.

But! The IRS’s recent ruling has delayed the Roth treatment provision, so that it will not become effective until 2026. This means your catch-up contributions are still “pre-tax,” at least for the next couple of years.

What is the bottom line here? If this situation applies to you–if you are over 50, earn more than $145,000 a year, and want to make catch-up contributions to your employer-sponsored 401(k) plan–you now have an extra couple of years to enjoy the tax perks of these contributions. This relief, in turn, might allow you to make larger charitable gifts than you had originally planned when you budgeted for 2023’s charitable giving.

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Rethinking inherited IRAs

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Rethinking inherited IRAs

As you build your estate plan and consider how to provide for your adult children, keep in mind that naming children as the beneficiary of an IRA or other qualified plan probably is not something that should be automatic.

For starters, if you are charitably-minded and have other assets, such as highly-appreciated stock, to leave your children, those assets should come first. This is because your children will inherit the stock at a “stepped up” basis, meaning their capital gains tax hit upon sale will be far less. Plus, if you name a charitable organization, such as your donor-advised fund at The Community Foundation, as the beneficiary of your IRA, the IRA proceeds won’t be depleted by either income tax or estate tax. Your kids, on the other hand, will have to pay income tax on the proceeds of an inherited IRA.

This dynamic became even more important to consider when the law changed a few years ago, such that a child who was named as the beneficiary of a parent’s IRA, for example, could no longer count on a relatively straightforward and tax-savvy method of withdrawals called the “stretch IRA.” With the passage of the SECURE Act, that changed for many children who inherited an IRA after December 31, 2019. Instead of taking distributions over their lifetimes, affected children now need to withdraw the entire inherited IRA account within a 10-year period as calculated under the law.

If you’re evaluating options for how to handle an IRA in your estate plan, talk with your advisors and The Community Foundation about leaving an IRA to your donor-advised fund or other charity via a beneficiary designation. Or, if you’d still like to provide an income stream to your children following your death, in some circumstances it might be worth considering establishing a charitable remainder trust to name as the IRA beneficiary (assuming the stars align vis-a-vis children’s health, their tax brackets, projected returns, and other factors).

Importantly, if you are a child of parents who own IRAs, they will appreciate you bringing this opportunity to their attention! Your parents might not realize that their good intentions to leave their IRAs to their children could be saddled with tax burdens down the road. Encourage your parents to talk with their advisors and give The Community Foundation a call. We are here to help make IRAs a win for everyone–your parents, their favorite charities, and you!

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Disaster relief efforts and The Community Foundation’s collaborative role

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Disaster relief efforts and the community foundation’s collaborative role   

Our hearts go out to the people of Maui—and all of Hawaii—in light of the tragic fires that occurred early in the month. By all accounts, those will take years, if not decades, to recover and rebuild from. Restoration costs are already estimated at $5.5 billion, although only time will tell just how much time and money will be needed. 

 

As if that weren’t enough, much of the U.S. slogged through what has been called the hottest summer ever—and July as the hottest month ever—with uncomfortably high temperatures affecting land and sea even before the start of hurricane season. And then there was Tropical Storm Hilary and a simultaneous magnitude 5.1 earthquake that struck Southern California. To round out the month, Hurricane Idalia made landfall on August 30, with extensive damage reported and tens of billions of dollars of losses projected. 

Fortunately, community foundations are well-suited to facilitate and manage relief funds for disasters and humanitarian tragedies, no matter where they occur. Certainly local community foundations in the areas most affected by a disaster consistently jump in immediately to establish funds to accept donations, which the community foundation then deploys rapidly and effectively to high-performing nonprofit organizations that are delivering relief where it is needed most urgently. 

 

Even community foundations and other charitable foundations that lie outside of affected geographic areas are committed to responding quickly by launching their own fundraising efforts, either promoting the funds established by community foundations in the affected areas or their own funds created to directly support relief efforts. Indeed, disaster relief funding is frequently coordinated by community foundations, which are widely viewed as one of the very best vehicles to help donors provide financial support to relief efforts. Community foundations understand, for example, that the most immediate needs in the wake of a disaster are often for food, shelter, water, and hygiene kits. In addition, The Community Foundation knows which nonprofit organizations on the ground are best qualified to meet those needs. 

 

With a deep understanding of philanthropy and charitable giving tools to effect meaningful change, the team at The Community Foundation is here for you. Whether your interests include disaster relief, education, the arts, social services, or other causes near and dear to your heart, The Community Foundation can help you fulfill your goals and intentions.

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

It’s (always) a great time to review your estate plan and legacy gifts

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It’s (always) a great time to review your estate plan and legacy gifts

Don’t forget that August is National Make-A-Will month. Even if your estate planning documents are already in place, this is still a good time to review your will, trust, and beneficiary designations to ensure that they still capture your financial and family situation, as well as your intentions. 

It’s hard not to be inspired by the incredible stories of generosity that no one saw coming. Every year, many nonprofit organizations receive estate gifts that they had not expected. Stories about these donors are heartwarming! (And, though not a bequest, we’re all inspired by extraordinary anonymous gifts!)

Remember, your fund at The Community Foundation can be an ideal recipient of estate gifts through a will or trust, or through a beneficiary designation on a qualified retirement plan or life insurance policy. Bequests of qualified retirement plans–such as your IRA–can be extremely tax-efficient. This is because charitable organizations such as The Community Foundation are tax-exempt. This means the funds flowing directly to a fund at The Community Foundation from a retirement plan after your death will not be reduced by income tax. This also means the assets will not be subject to estate tax.

The Community Foundation makes it easy for your attorney to draft bequest terms in legal documents, including beneficiary designations of retirement plans and life insurance policies. Please contact our team for the exact language that will ensure alignment with your intentions.

Keep in mind that even after you have executed estate planning documents or beneficiary designations, in many cases you can update the terms of the fund at The Community Foundation designated to receive the bequest upon your death. You will love the ease and flexibility!

We look forward to hearing from you and your advisors as you update your estate plan to ensure that your community legacy is intact!

 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

Like entrepreneurs, philanthropists inspire and innovate through their investments

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Like entrepreneurs, philanthropists inspire and innovate through their investments

Despite the recently-announced decline in 2022 charitable giving, we continue to hear inspiring stories from you and other fund holders and donors. We’re also hearing from more and more individuals and families who are not yet fund holders that they’re very interested in establishing a donor-advised, field-of-interest, designated, or unrestricted fund at The Community Foundation, and nothing could make us happier! Increasing charitable giving and connecting donors to their favorite important causes are our priorities at The Community Foundation.

The uptick in conversations about philanthropy has inspired us to reflect on the noteworthy generosity of so many entrepreneurs who become very generous donors and leaders in philanthropy. And on that front, the news keeps getting better. For example, the Giving Pledge has added six pledgers already in 2023, one more than during all of 2022; savvy investors, especially in the tech sector, are enjoying the market’s 2023 rebound, at least so far; and we’re seeing an increase in the number of those who’ve experienced successful business exits take a visible role with their commitments to important projects in their regions. 

Over the years, we’ve observed an interesting trend. Entrepreneurs are certainly donors, but are donors entrepreneurs? In other words, is an entrepreneur’s approach to philanthropy similar to the entrepreneur’s approach to building a business? Do they give it like they made it?  

We believe the answer is yes, absolutely. And often in ways that entrepreneurs–and other donors, for that matter–may not consider. 

Indeed, an “entrepreneur” is sometimes defined as a person who aspires to build something bigger than themself. That’s exactly what happens when a donor supports favorite causes through a donor-advised or other type of fund established at The Community Foundation. This is especially appropriate because contributions to funds at The Community Foundation are much more than simply charitable donations. Contributions are investments in local philanthropy to improve the quality of life in our region and to support the causes the donor cares about. The return on investment is human-centered rather than only financial, and those returns deliver benefits to not only the nonprofits who receive grants from the fund, but also to the community as a whole.

Here are few ways that gifts—rather, investments—via a fund at The Community Foundation are similar to entrepreneurship:

–A gift from one person, one couple, or one household can have a generous ripple effect that “scales” to help many, whether that is to feed many families, subsidize a childcare center, or help support programs that allow parents to work and earn a living.

–Donated funds are the “seed money” that can inspire innovation, the kind that allows the grantee organization to function in new and efficient ways. 

–A gift can expedite creation of the recipient organization’s brand new programs via pilots (in the tech world, “MVPs, ” or minimally viable products). This form of testing and learning is a critical step to achieving product or service viability, whether in the for-profit or nonprofit sector.

–Philanthropic support can provide a nonprofit organization with the means to hire much-needed talent, such as a social worker or a fundraising professional. This is not unlike an entrepreneur’s need to hire key team members, such as a software engineer or a full-time chief financial or accounting officer, who may have otherwise been unaffordable or delayed in coming onboard. 

–When philanthropic support is provided through a local business development initiative, a grant can provide ongoing funds that help create new businesses and jobs, whether for essential services or potentially breakthrough technologies. This type of investment is entrepreneurial on both the for-profit and nonprofit sides of the equation! 

If you’re interested in reading more about entrepreneurs as philanthropists, you might enjoy specific topics such as making charity a habit, checking out a punch list of five ways to give back, and a few “oldie but goodie” perspectives that have stood the test of time. 

By employing an entrepreneurial mindset, donors can envision and deploy their gifts as investments capable of helping charitable organizations scale to great success and make a real difference in the quality of life for the people they serve. The Community Foundation is always happy to discuss various ideas and strategies to leverage entrepreneurial principles in your charitable giving, whether or not a donor or fund holder is an entrepreneur. We appreciate the opportunity to work together! 

This article is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.