Jason Demland

If you give substantial amounts to charity every year then it’s extremely important to consider taxes. The reason for that is simple: The less you pay in taxes means that you have more to give!

I know many people that love to give generously to causes they are passionate about. Christians specifically can be enormously generous in their giving. With worthy ministries like their local church, foreign missions, and local ministries (e.g. community pregnancy centers, homeless shelters, battered women’s centers, fostering and adoption ministries, etc.) there are plenty of places worthy of receiving donations of your hard-earned money. Many of us give regularly to these ministries out of our ordinary income.

But what about a year where your income is especially high? This increase in income could be due to selling a business, selling a farm, getting a big bonus at work, or just be a result of the culmination of years of hard work bringing in a higher take-home than you could have ever dreamed of. Regardless of the reason for the increase, higher income usually results in higher taxes. Consult the table below to see just how much in taxes can be at stake when your income starts getting into the hundreds of thousands of dollars a year. It’s worth the time and energy to think about strategies to reduce your tax burden and increase your charitable giving.

Gifting Large Sums To A Donor Advised Fund Can Reduce Your Personal Income Taxes

Donating to a Donor Advised Fund works very much like donating directly to a charity would work. Gifts are limited by the IRS and the amount of your deduction is limited by your adjusted gross income for the year:

In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks.  Contributions to certain private foundations, veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks), however.


But instead of giving the money (or stock or other items) to the charity directly, your donation is made to the Donor Advised Fund. You get the charitable deduction commensurate with the type of gift and AGI that you have, but the charity doesn’t get the money…yet. The donor advised fund can hold the donated funds to be granted to a charity at a later date. “Why would you do this?” you may ask. “Why not just give the money directly to the charity if that would get you the same deduction”? you continue to ask.

I have an answer.

Why Not Just Give Directly To A Charity

Giving generously is great and commendable. The Apostle Paul said in his second letter to the Corinthians So let each one give as he purposes in his heart, not grudgingly or of [f]necessity; for God loves a cheerful giver”. With this in mind, it’s certainly a mark of faith to want to give. It’s also a mark of faith to exercise wisdom. If you know exactly how much and where you want to give then a donor advised fund may not be right and could be adding unnecessary complication to a simple situation. However, when you are presented with a larger income than normal and a subsequently larger amount of charitable giving than usual, it is important to do your due diligence on the organizations you want to support financially. I’ve heard many stories of “when helping hurts” and times when generosity was horribly abused. A donor advised fund supports taking some time before making lump sum donations to an organization while still realizing the maximum tax deduction in a given year. This way you can properly vet an organization and even give gradually to them. Here’s an example:

John usually makes about $150,000 a year in wages from his job and tries to donate at least 10% of his income to his church ($15,000 a year). John and his wife also support the local community pregnancy center with recurring gifts of $500 a month ($6,000 a year). They normally use the standard deduction when filing taxes since it is so high and they have few other deductions. However, this year John had an excellent year at work and will have around $500,000 in taxable income for the current year. If John and his wife want to maintain their effective charitable giving rate of 14% (15,000+6,000=21,000 / 150,000 = .14) they must donate a total of $70,000 this year.

But John and his wife are in a whole new tax bracket this year and will likely be in the 35% marginal rate. It’s also very likely that John’s annual pay will revert closer to his mean of $150,000 a year next year. In this scenario John and his wife can donate up to 50% of their AGI (approximately $250,000) and deduct it. This is great! But they don’t know where to give all of that money to. They know that the local community pregnancy center is in extremely good financial health and their local church just started talking about building a new facility. Instead of making a decision on where to donate the money right now John and his wife make a $250,000 donation to a donor advised fund so they can direct where the money is given at a later date while still lowering their taxable income with a $250,000 deduction.

John and his wife took their time vetting an orphanage ministry in Haiti and after a year they decided they’d use their donor advised fund to send $30,000 dollars a year for as long as it would last (according to a quick time value of money calculation using 6% interest that’s about 9 and a half years!).

In the previous example not only are taxes saved, but the value of the donated amount is increased because of the tax savings. At a marginal rate of 32% $250,000 becomes a gift of only $170,000. A reduction of $80,000! There’s also been a huge added benefit of flexibility, because now that the tax deduction has been realized in the current year you can take a breath and take your time to decide where to donate the funds to from the donor advised fund.

How To Use A Donor Advised Fund

Donor Advised funds are usually sponsored by another 501(c)3 that runs the fund. Investments from donors can be pooled inside the fund and then donor’s “advise” or request grants to be distributed from the fund to charities of their choice.

Some very large Donor Advised funds examples are Vanguard Charitable, Schwab Charitable, and Fidelity Charitable. There are also local area foundations like my town’s Defiance Area Foundation that can be especially helpful at recommending community resources that may need funding.

Donors can donate cash or appreciated stock to a Donor Advised Fund (gifting appreciated stock is an especially great way to add a “whammy” to your tax savings…making a double whammy). Once the funds are invested in the fund they grow tax-deferred and that’s beneficial for the eventual organizations that might receive the donations.

The donor advised fund usually has its own investment process, so that is something you’ll want to vet. The larger DAF providers (like Schwab) will allow you to have your own advisor direct your investments if you’re over a threshold (right now it’s $250,000 in the fund). Usually there is a minimum amount that must be contributed to the DAF (could be anywhere from $5,000 to $50,000 depending on the sponsor). It’s important to know what kind of organizations the DAF will distribute to as well, since they technically are the ones that get to decide (though if they deny a donor request they probably won’t get very many more donations). Usually any qualified charity will be available to give to. This is definitely an area that takes some research, so make sure to talk with your Financial Planner or C.P.A. about any strategy you may want to employ.

Happy Giving!

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Jason Demland

It’s tax season!

You and millions of other people are gathering documents smattered with seemingly random number/letter/hyphen combinations.

W-2 K-1 1099 1099-R 1099-DIV 1098 1098-T 1099-INT 1095-A W-4

It’s time to diligently document every dime you brought in and try to find every expense you can deduct.

If you still have to pay taxes after all of that sleuthing – then congratulations! You must have made money.

While it’s nice to know you’ve been a profitable and valuable contributor to the society that we live in by paying your fair share of taxes, I’m sure you’re wondering if you’ve paid too much. We all do. Whether it’s because we are wary of the wasteful tendencies of our federal government or because of the opportunity cost we feel because we’re sure we could do a better job helping ourselves with the thousands of dollars we’ve been taxed; every single one of us wants to be certain we’ve paid what we owe and not a dollar more.

It’s our duty as responsible providers for our families to pay as little as legally obligated to our federal government. Our money is better spent on gifts for children and grandchildren, donations to our churches for buildings or other ministries, directly feeding the hungry, and caring for widows and orphans in our communities. If you agree with that then heed these 5 tips on how to pay less taxes in 2022.

  1. Look at paying taxes over your lifetime rather than year by year. Tax preparers are excellent at taking the data you give them and looking for every deduction and credit you can get in the current tax year. That’s because tax preparers are awesome historians. They look at what has happened in the past tax year and tell you how to lower your tax bill for that year. We all tend to do this. However, it is beneficial to look at your tax strategy over the rest of your life vs. just taking it year by year. When you do this you can decide whether a Traditional IRA or 401(k) contribution makes more sense (deduction in the current year) versus contributing to a Roth IRA or 401(k) (no deduction now, but tax free withdrawals potentially in the future). When you look at taxes over your lifetime you can decide between making a donation in the current tax year or taking the standard deduction this year and doubling up charitable donations next year to be able to itemize a larger amount. You may benefit from Roth conversions, gifts of appreciated stock, or many other tax strategies that don’t necessarily save money in the current year – but could save more over the long term.
  2. Avoid realizing short-term capital gains. If you realized short-term capital gains you probably made a mistake. Long term capital gains (gains realized on an item that you held for at least 365 days) are taxed at advantaged rates that could be as low as 0%. Short term capital gains are taxed as ordinary income, which means that they can push up your income tax to a higher bracket and are taxed at your ordinary income tax rate which could be as high as 37%! The only time realizing a short-term gain might be a good idea is if you’re certain that the price is going to tank and you are going to be able to time the drop in value by selling high even though you’ve held the investment for less than a year. This would apply if you were an Enron investor and had inside information (illegal to use btw) that the company was going to crater so you sold your stock at short term gains. Outside of a situation like this I’m hard pressed to think of any real-world situations where realizing short term gains is a good idea. Buy and hold when you invest. Actively managing your taxable investments can result in potential short term capital gains that are taxed right alongside an actual decrease in value of the portfolio. It’s extremely important to have a long term tax strategy if you have any non-tax-qualified (non retirement) accounts with investments in them.
  3. Give to charity in bulk. I will always advise people to give charitably because it’s the right thing to do and not primarily to save in taxes. However, sometimes folks may be considering giving a large gift outside of their normal monthly giving to their church or favorite charity. When this is the case it may sometime make sense to “double up” your donations to maximize your tax deductions in a certain year.
  4. Consider using a donor-advised fund. This strategy is kind of like the inverted version of the strategy I just listed about “doubling up” donations. If you know you’ve got a large chunk of money earmarked for a charity and it makes the most sense to get a deduction for that donation in the current year but you aren’t ready to actually give the money to the charitable organization you can set up a donor advised fund and make your charitable contribution to it. You’ll still control the money (investment decision-wise) and control when and who it is disbursed to. As long as the money goes to a qualified charity the deduction will stand. Money can stay in the fund indefinitely.
    • Example: John has $100,000 saved up to contribute to his church’s building fund when they finalize the plans to build a new addition for their church. He could really use the tax deduction this year, but it doesn’t look like the church will be ready to move forward until next year at the earliest. John can donate the 100k to his donor advised fund to get the deduction in the current year and then gift the money to his church the following year when they are ready.
  5. Gift appreciated stock. If you have investments in a non-tax qualified account (an account that is taxed on capital gains rates) that you’ve held for more than one year, then consider gifting appreciated positions in the portfolio instead of gifting cash. Gifts of appreciated stock must be made in-kind (which means you must transfer the positions to the charitable organization) so the charity must be able to receive the positions in kind with a brokerage account of their own. Most charities incentivize this kind of giving and so they usually have an account capable of receiving these gifts. The benefit to this method is two-fold because the total value of the positions that are gifted to the charity can be claimed as a deduction and the donor does not have to realize the capital gains on the positions. The charity is tax-exempt so they don’t have to pay the taxes either.
    • Example: John has $100,000 dollars saved that he’s planning to donate to his church. John also has a non-tax qualified investment account he started with $50,000 dollars and invested in a fund that has grown to a total of $100,000 in value. He now has $50,000 in unrealized capital gains in the non-qualified account. John can donate the appreciated investment of $100,000 to his church directly or through a donor-advised fund and will be able to deduct the entire donation (subject to IRS rules) and not have to pay any capital gains taxes on the investment.

This is just the tip of the iceberg as far as long-term tax strategy goes and the options get even more robust if you’re self-employed, have stock options, have other assets like farm ground that you may sell, and more. Remember to find someone who can help with taxes for more than just the current year for 2022 when you’re getting your 2021 taxes sorted out.

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Jason Demland

That doesn’t mean we have to enjoy them. They happen frequently. I build portfolios knowing this and factor in large pullbacks. Sure, these are buying opportunities and big drops are necessary for those of us that are socking money away for financial independence. They’re also scary as heck and uncomfortable and especially nerve-racking for the people that are taking money out of their investments to live on. We’re used to the S&P 500 only going up for the past 9 years. Since 2013 the index has hit a new all-time high every year! As a result when the market drops, goes flat, and stagnates our spoiled little selves start to get squeamish.

But take heart. I know when the bear market will end.

It will end as soon as stocks stop going down.

The problem is, there are none of us who know when that is. There are plenty of advisors who will pontificate about Russia and inflation and further geopolitical strife. They’ll lead you to believe they’ve got their finger on the pulse of what’s happening and are making adjustments to take advantage of this drop or to mitigate the losses. They’ll confuse you with big financial terms and obscure economic news to give the impression they’ve got it under control and know what to do. But the truth is Warren Buffet doesn’t know. Jack Bogle’s ghost doesn’t know. Even the leading expert on investing in European emerging markets (primarily Russia) guessed wrong on the Russia invasion and lost a record amount for Blackrock’s Emerging Frontiers Fund.

If the smartest investor on the planet with regards to Russia missed this bear market then what do you think the chances of your local financial advisor set up on main street next to an auto parts store or funeral home has?

The fact is that owning stocks for the long term has historically been a great investment. Diversification is your friend. Having a plan is the most important thing. Don’t panic sell. Don’t give into the temptation that you have to do something. Your portfolio was built for times like these. Revisit your plan. Talk to your financial planner.

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