The Season of Giving: Incorporating Philanthropy into Your Financial Plan
As we approach year-end and the holiday season, charitable giving becomes a priority for many of us. Charitable giving can be a win-win situation for investors, as it is a way to do good by contributing to causes and organizations that have meaning to us and it can help with tax planning, estate planning, portfolio rebalancing and even required minimum distributions in some cases. Philanthropy and Financial Planning Philanthropy and charitable giving can play an integral role in your financial planning. Charitable contributions are tax deductible as long as you are able to itemize deductions on your tax return. Clearly, this aspect combines your philanthropic goals with the practical benefits of tax reduction. There are a number of ways of making charitable contributions: Cash donations. This is as simple as sending a check to your favorite charitable organization or making a donation online with your credit card. Donations of appreciated assets such as shares of stock, mutual funds, ETFs, real estate holdings or others. The amount of the donation is the market value of the security on the date of the gift. In the case of real estate or a piece of art, it is generally a value established by a recent appraisal. Donating appreciated securities can also go hand-in-hand with any portfolio rebalancing you might be doing during the year. Using a donor advised fund (DAF). This is a fund to which cash or appreciated assets can be contributed. The money is invested and donations to eligible organizations can be made over time. The tax deduction for contributions to the fund pertains to the year in which assets are contributed to the DAF. Note that donations made with appreciated securities can have a double tax benefit in that the value of the securities donated can serve as a deductible contribution and any capital gains taxes that would be due if the securities were sold can be avoided. The Tax Cuts and Jobs Act that went into effect for the 2018 tax year raised the level of the personal exemption and capped certain deductions, making it more difficult to itemize. If this is your situation, one strategy to consider is bunching multiple years’ worth of contributions together into a single year to ensure that you can itemize your contributions and save on taxes for that year. Additional Charitable Vehicles Besides the charitable giving methods discussed above, there are some other methods that can serve the dual purpose of fulfilling your philanthropic goals and providing a financial planning benefit. Qualified charitable distributions (QCDs) are available to all traditional IRA account holders who are at age 70 ½. QCDs allow up to $100,000 to be distributed from their IRA tax-free to a qualified charitable organization. Beginning in 2024, this amount will be indexed for inflation. For those who cannot itemize and who do not need some or all of the money in the IRA, this can be a tax-efficient way to contribute to charity. Before the commencement of required minimum distributions, QCDs can serve to reduce future RMDs. QCDs can also be used to satisfy some or all of your RMD obligations once you reach the age where they are required. Charitable trusts can be used in several varieties to contribute assets that will benefit a charity and also provide a benefit for one or more designated beneficiaries. Charitable remainder trusts and charitable lead trusts are two common forms. As the donor, you will receive a tax benefit from funding the trust. Private foundations are a type of charitable entity formed by an individual, a family or a corporation to support their charitable endeavors. A board of directors or a group of trustees is established to oversee the foundation’s investments and charitable grants. There can be a number of tax benefits from a private foundation including deductions for assets donated to the foundation and the elimination of applicable capital gains taxes. Establishing Charitable Goals In determining what level of charitable donations to make and which organizations to support, it is important to look at your overall financial situation and causes that are important to you. In deciding upon which organizations to support, some things to consider include: Monitoring and assessing philanthropic impact of the organization. Does the organization make a positive impact upon the areas they serve? Partnering with organizations to make a meaningful difference can have a profound personal impact on you. Decide what causes are important to you and look for organizations that make an impact on those causes. Establish metrics and benchmarks for evaluating the effectiveness of donations. Adjust your giving strategies based on feedback and outcomes for these evaluations. Incorporating charitable giving into your overall financial planning can be challenging, but also very beneficial. Contact your Wedbush advisor to discuss some strategies and tactics that fit your situation. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Holiday Spending: Keeping Financial Wellness in Mind
With the holiday season upon us, it is important to plan out our spending to both be sure that those who are important to us receive a gift and that we do not severely overspend this season. While gifts and celebrating the season are important, it is also important to be sure that our holiday spending does not put us in a financial hole to start the new year. Set a Holiday Budget A great first step is to set a budget for the holiday season. This should include expenditures such as: Holiday gifts Meals and parties Travel There may be others or variations of these categories, but, in total, the amount spent during the holiday season can add up quickly. It is a good idea to establish a budget, starting with a list of your anticipated expenses during the holiday season. Putting it all together in a single place can be a real eye opener in some cases. Look at Your Overall Year-End Financial Priorities Take your holiday spending budget and look at it in the context of your overall year-end financial priorities. These might include things like: Fully funding your retirement plan and other investing priorities Ensuring you have sufficient cash to cover your tax liability early next year Paying off debt A family vacation Meeting ongoing obligations If your holiday budget fits into your overall spending priorities for the last part of the year, that is great. If your preliminary holiday budget will put you into a financial hole to start the new year, it might be time to relook at your holiday spending with an eye toward scaling back. Set Priorities It is always important to set spending priorities; this is definitely the case for the upcoming holiday season. Celebrating with family and friends is important. Buying gifts for friends and family is also important. However, so is staying within your financial means. In the case of gifting, be sure to determine who are your priority people for gifting. This might be immediate family and some close friends. It is wonderful to let these important people in your life know you are thinking of them and a gift can help do this. However, gifts do not have to be excessive in price. As the old saying goes, ‘it’s the thought that counts’! Review Your Gifting List It makes sense to review your gifting list periodically to determine who you want to buy for and what types of gifts to buy. For close family, maybe you spend a bit more, especially with children or grandchildren. With friends or others, maybe a gift exchange where you pick a name. Perhaps if you are a baker, you could send a dessert item to them. Perhaps just a card or phone call to let them know you are thinking of them and that the relationship with them is important. Shop for Bargains Sales and bargains are a good thing. When you shop for gifts, be sure to look for sales on items you are planning to buy. With online shopping and other avenues, finding what you are looking for at a lower price may be possible. Depending upon the type of gift item that you are looking for, you may be able to find a similar item of similar quality at a lower price in some cases. Experiences Matter The holiday season is often a time to reconnect with family members and friends you may not have seen a lot of during the year. Make the most of the season and get together with these folks. Maybe a lunch gathering around looking at the holiday decorations in your town. Perhaps you might consider hosting a gathering at your home, or perhaps there is a charitable cause you could unite on to help support. Maybe this is a food or clothing drive in your area. Nothing reflects the spirit of giving and the holidays like helping those in need. Providing this help with close family or friends may be a bigger gift than anything you could buy them. What is better than helping others and providing that help with those who are close to you? Common Sense and Restraint The holidays are time to celebrate and connect with family and friends. It is also a time to help others and be thankful for what you have. Celebrating with gifts for others and gatherings is wonderful, but there is no need to get carried away. Look at ways to keep spending in check while still enjoying the season. You will be much happier in the new year if you show some restraint in your holiday spending. Need help aligning your year-end financial priorities with your holiday spending budget? Contact your Wedbush financial advisor for some ideas. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Year-End Tax Planning: Leveraging Tax-Loss Harvesting
As we near the end of 2023, year-end tax planning is a critical task. This can take a variety of forms and encompass a number of strategies and tactics. Regardless of your situation, reviewing your tax situation prior to the end of the year will give you an opportunity to make any needed adjustments prior to year-end to try to minimize your tax bite. One strategy to consider, if applicable to your situation, is tax-loss harvesting. What is Tax-Loss Harvesting? Tax-loss harvesting is selling investments held in a taxable investment account in order to realize that loss. These losses can be used to offset gains realized on other investments during the year. A portion of these losses can be used to offset other income and any unused losses can be carried forward to a subsequent tax year. Investments such as individual stocks, bonds, mutual funds, ETFs and others can be used in a tax-loss harvesting strategy. For example, if you own a stock mutual fund with a cost basis of $25,000, but whose current value is $21,400 then you would realize a loss of $3,600 if you sold all of the shares. In other cases, you might own a fund or security where you have multiple cost basis levels due to purchases made at different times. If some of those shares are currently valued below their market value, you can sell only those shares at a loss. This may depend upon how your account custodian accounts for the cost basis of different share lots. How Tax-Loss Harvesting Works: Gains and Losses When working through the mechanics of tax-loss harvesting, it is important to understand the concept of short-term and long-term gains and losses. There is an ordering process in matching gains and losses. First, short-term gains, or gains realized when the security is held for less than a year, are offset against short-term losses. Long-term gains are offset against long-term losses. Any excess gains or losses in either category are then offset against any remaining gains or losses. To the extent that any realized losses exceed realized gains for the year, they can be used to offset up to $3,000 in other income for the year. Any remaining unused capital losses in excess of your capital gains can be carried forward for use in a subsequent tax year. Short-term gains are taxed as ordinary income; the gain will essentially be added to your other income for the year. Long-term capital gains are taxed at preferential capital gains tax rates at 0%, 15%, or 20% depending upon your income and filing status. Some higher income taxpayers will pay an extra 3.8% depending on their income and filing status. Beware The Wash-Sale Rule It is important to avoid violating the wash-sale rule when doing tax-loss harvesting. The wash-sale rule says that within a 61-day period surrounding the sale of any security for a loss, you cannot repurchase the same or a similar security. This is the period 30 days prior and after the sale, plus the day of the sale transaction. Violating the wash-sale rule will prohibit you from using this loss for tax purposes. The rule includes all accounts, meaning that you cannot sell the security for a loss in a taxable account and then purchase it inside of your IRA. The same security part of the rule is pretty straightforward. If you sell shares of stock ABC to realize a loss, you cannot go back and buy ABC shares during the wash-sale period. The same would apply to mutual funds and ETFs. If you sell shares of an S&P 500 index fund at a loss, you could not buy shares of any S&P 500 fund during this period, even if you sold a Vanguard fund and wanted to buy a Fidelity fund. The rules are a bit vague on similar funds. For example, would a fund tracking the S&P 500 be similar to a fund tracking the total U.S. stock market? It pays to consult an advisor or tax expert to clarify this issue for your situation. Review Your Investment Goals and Your Portfolio Tax-loss harvesting should be considered a tool versus an objective. By this, we mean that similar to many other tax and financial planning strategies, tax-loss harvesting should be used to help achieve an objective, not as an objective unto itself. That said, tax-loss harvesting can be useful in realigning your portfolio based on a review of investment goals and a review of your portfolio holdings. In the case of your holdings, it is a good idea to review the relative performance of holdings such as mutual funds, ETFs and stocks relative to their peers or your expectations. If there are holdings to be sold, using tax-loss harvesting can translate to tax savings on these sales inside of a taxable account. Portfolio rebalancing, aligning your holdings with your target asset allocation for various asset classes, should be done periodically. To the extent that they are holdings to be sold as part of this process inside of a taxable account, using tax-loss harvesting can make this a more tax-efficient process and possibly help reduce your tax burden for the year. Tax-loss harvesting should be coordinated with your overall investing strategy. It can be done at any point during the year, not just at year-end. Please reach out to your Wedbush financial advisor to discuss how tax-loss harvesting can be a beneficial tool in your overall investment and tax planning strategy. Disclosure Wedbush Securities does not provide tax or legal advice. Please consult your tax or legal advisor. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns