By Stephen Hassell, CFP®

Transcript of Charitable Gift Stacking Video:

Today, I'd like to talk to you about charitable gift stacking and how, if you're engaging in ongoing charitable giving year by year and not getting a tax benefit from it, you can restructure things, especially in high-income years, to get a tax benefit from it.

I'm going to use some simplistic examples here. Of course, your situation will differ, but let's get into it.

First of all, the individual I'm going to work with here earns $100,000 and tithes consistently to their local church at 10%. Their annual charitable giving amount is about $10,000.

Now, you may or may not be aware that there's something called a standard deduction when you go to file your taxes. And this is the IRS's way of saying, hey, unless you have itemized deductions that exceed these amounts, then just use this amount to offset income.

So, whatever your income is for the year from a variety of sources, you reduce by the standard deduction.

In this example, I'm just going to use an individual who's single, and that amount's currently $14,600.

As long as your itemized deductions, things like charitable gifts or mortgage interest, are less than this $14,600, then the government is just going to allow you to offset your income by this amount. Which means, in our example here, with this $10,000 of charitable giving, that's less than the standard deduction.

So, year by year, with the charitable gifts that are being done, there is zero tax benefit that's being received.

Now, let's just say this individual has outside sources of savings or perhaps even high income, either through a job, unexpected bonus, or now with the new IRA beneficiary inheritance rules and a 10-year rule, this can find somebody in a situation of having to recognize far more income than they originally anticipated.

And so I'm just going to make this real simplistic for illustration purposes. Let’s just take the same 10,000 and say, well, over the next 10 years, this would be $100,000 in gifts.

And let's say the same person also has $100,000 at their disposal. Maybe it's through a bonus; maybe it's through unexpected income from inheritance.

What this individual could essentially do is direct $100,000 into what's called a donor-advised fund in the current year. And this would be, in essence, front-loading the next 10 years of charitable giving in order to get a tax benefit today.

The way this would essentially shake out is that the same individual would have their various income sources, and then now their charitable giving is $100,000 in one calendar year. Albeit, it's not all going to the charity in one year. It's going to a separate designated account here called a donor-advised fund.

But we're going to reduce income further by, now, instead of doing standard deduction, we're going to do itemized deduction—which, in this simplistic example, excluding any mortgage interest, any of that kind of stuff, is $100,000.

Let’s just say this person is also in the 32% bracket for federal taxes. Now we can start to calculate the net tax benefit to them of engaging in this strategy.

If we take the $100,000 and we reduce it by the standard deduction that they would have otherwise received, we get to $85,400 of additional offsets to taxation, which, again, in our example, we're assuming is at 32%.

And so this is a way for this individual to save roughly $27,328 in taxes, all in one year, versus $0.

So if they just engage in the practice that they've been doing over all those years—into the future, $10,000 per year, which consistently falls beneath this standard deduction here, then they effectively receive zero tax benefit. Versus this gift-stacking concept here, which has a net tax benefit in this example, of course, of roughly $27,000.

On a go-forward basis, what does this do for this person?

As they receive their income from their paycheck, which goes to their bank account, they are not using their bank account for charitable gifts anymore. Because, remember, we built up this donor-advised fund over here with $100,000—and this can be held inside of an interest-bearing money market. It could even be invested. And there's also no time limit on giving this out. In year one, they would gift out $10,000; year two, $10,000; and so on and so forth.

In our example, of course, we're just looking at a 10-year period, but you can customize this as you need to.

This can be a very helpful strategy, also, for people who are trying to engage in charitable giving prior to RMD age, which is 75. And your situation will be unique to you, of course.

So instead of using the bank account for ongoing charitable giving, they would be using this donor-advised fund.

And then, going forward, this individual would still get to use the standard deduction to offset the tax liability overall.

So, hopefully, this makes sense. If not, review it with your advisor as, of course, your situation is going to be unique to you.

But this would just be a way to take abnormally high-income years and concentrate some of your charitable giving into a lump sum using a donor-advised fund, which would, in turn, allow you to kind of gift this money out over time.

In terms of the charity or charities who may receive your funds, nothing would necessarily change in terms of the frequency that they receive the funds. But the big deal is you got this tax benefit of roughly $27,000 in this example.

Hope this helps in your optimization of your charitable giving and your taxes. And if there's anything we can do to help or you have any questions at all about this strategy, let us know.

Thanks for watching.

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