[00:00:00] Welcome to The Financial Call. We are financial advisors on a mission to guide you through the financial planning everyone should have. Whether you're doing it yourself or working with a financial advisor, these episodes will help you break down complicated financial topics into practical, actionable steps. Our mission is to guide motivated people to become financially successful. Welcome to The Financial Call. We are in Season 7, which feels absolutely crazy to me. Yeah, second to last season here. We dreamt up this guided path. I don't remember when it was. It's been almost two years, I think. And even before that, you had been dreaming about this concept for a while, hadn't you? So refresher, if you're just listening here, the way the guided path works is we took a different financial planning and wealth management topic. And then we broke it out into five different episodes, maybe six, maybe seven, depending on the topic. And we walk you from the most basic to the more complex strategies

[00:01:00] within that category. So it started out like income planning, social security was season two, investing season three. For example, in the investing season, it goes basics, then stocks, then bonds, funds, real estate. Then you get into things like options, futures, private markets. And then the seventh episode in that season was how do you bring it all together, building a portfolio. So I'd never seen anything like this. And the guided path is what I wanted when I first started in this industry. I wanted someone to lay it out. So I never found it. So we decided to build it and I'm excited to get to season seven. But I remember when we first built it out, I was sad that it was going to take us so long. I was like, Oh, there's such great topics in season seven and eight. It's too bad. We won't get to those until a year and a half from now. But here we are. You have a child that's new. Big life change. How old is he now? Eight months. For sure. That happened throughout this process. Yeah.

[00:02:00] Crazy. Today, we kick off the charitable giving season, which I love. I love the charitable giving season in general, the concept, because it gives us financial advisors an opportunity to just one, witness the good that our clients do a little bit. And if we can get really efficient with their charitable giving, maybe we can help them do a little more good than they would have done otherwise. And even if they're able to do their good that they would have done and then save some money on taxes, that's great as well. It feels like we're able to help in so many ways. And then it's also one of those areas where a little bit of knowledge goes a long ways in terms of saving you thousands of dollars. And so hopefully this season gives you that little bit of knowledge. Based on your situation, so that you can save quite a bit of money. If you're not charitably inclined, or maybe you give your time instead of giving money, or whatever it may be that you do, this season may be less applicable to you. It might still be

[00:03:00] worth listening, just so that you know. What your options are, because it's funny, we run into some people like, well, I don't give to charities, but I sure as heck am not giving to the government. You might determine you're okay giving away 100 to a charity instead of giving 30 to the government in taxes. If that's the case, then maybe this season is for you. So the first episode is donating cash versus stocks. So this is important because most people donate wrong. We find that most people, and that'll be a common theme here, throughout this entire season is the ways to give probably should be changed. If you have very much wealth at all, and the older you get, different things become available to you that at some point you should be using your assets for donating and then replacing assets. But we'll talk more about that today. We're going to cover this from start to finish, donating stocks versus donating cash. I think Laura, you're going to run with most of it, right? Yeah, I think this is a common situation that we come across and it's pretty cool. Oftentimes

[00:04:00] when we meet with somebody for the first time, we'll ask if they're charitable because for one, it is very common, especially here in our state, a lot of people donate to local churches or other organizations. So it is fun to see how people are donating, but yeah, this is a common one that we come across and I think the most common way that people are donating is cash. Just donating from their account. They'll save a certain amount and pay it monthly or annually, but they're just doing it from their accounts and just a reminder of how it works with the standard and itemized deductions. So if you go back to the tax season, I think that season four, we talk about in the first episode, how the government calculates your taxes, basically how the standard deduction works, how the itemized deductions work, usually you're getting the biggest. Tax benefit for charitable contributions if you itemize your taxes. So just a quick refresher, your itemized deductions, those are a list of things like mortgage interest, state and local income tax, charitable

[00:05:00] giving, medical expenses, if they're pretty high, you can add all those things up. And if it's greater than the standard, just set deduction, you can itemize your taxes instead. Reduce your taxable income by that amount if the standard deduction is higher than that list of itemized deductions Most people just take the standard and right now with the standard deduction being so high a lot of people are taking the standard rather Than itemizing so they feel like they're not even getting a tax benefit from their charitable donation This was something that happened during Trump's tax cut back when he was in office He wanted to simplify the tax filing process And so he pushed the tax deduction, the standard deduction up. So in other words, it's now 13, 800, but when he changed it, it went up to 12, 000 for an individual. And it used to be only 6, 000. And so it doubled it. So it made it so very few people had enough other deductions to

[00:06:00] itemize. And for a couple right now, it's 27, 700. So if you're thinking, I don't know if I would itemize, there's usually a really quick way and you should go back and listen to the previous episodes because we're not going to go into it very far, but charitable giving is one of the big three, charitable giving, mortgage interest, state and local income tax, those three, state and local income tax is limited to To $10,000. That was also part of Trump's tax changes. That one was painful for a lot of people, and that includes real estate taxes, that includes income tax on your wages and earned income. Anyway, that's limited to $10,000. So if you have $10,000 of state and local income tax, they call that salt. And if you have. Let's call it 15, 000 of mortgage interest because you have a pretty decent sized mortgage. You're already at 25, 000, so your charitable giving doesn't have to be that big before it starts to benefit you. But if you don't have a mortgage and you have 10, 000 of SALT, state and local

[00:07:00] income tax, you have to give away 17, 000 before, as a couple, before you even get any benefit whatsoever, because even if you don't give money away, You get the standard deduction of 27, 000. So that's the quick refresher. I wanted to just touch on that so that people understand. I think sometimes people get confused about the whole, I'm giving you a charity, I'm getting a benefit. And it's like, you're doing good things, but you might not actually be getting a tax benefit if you're still inside the standard deduction. And so the cool thing about donating stocks versus cash. You still get a tax benefit, even if you're taking the standard deduction. So we're going to explain a little bit about how this works. So obviously giving cash, you just give cash. You can itemize your taxes with it if it's greater than the standard, but not much else to it. The idea of donating stocks or appreciated assets, you can basically, normally when you buy an asset inside of a brokerage account. You're buying the asset with after tax dollars. So the price that you buy it for is called your cost basis. Let's say you buy a

[00:08:00] stock, it's worth 50. That's your cost basis. Any difference between the amount that you bought it for and the value of the stock when you sell it is the growth on the. Investments. So let's say you buy a stock for 50, the value grows to 150. If you were to sell it at that point, you would owe taxes on 100 of growth. If you've held it for at least a year, you're charged capital gains rates, which again, if you go back to the tax season, you can understand the difference there. But normally when you sell it, you'd have to pay. That capital gains tax on the growth. However, if you were to donate that stock, that's worth 150 now to a qualified charity, you avoid paying the taxes on that growth. The important thing is you don't want to sell the stock worth 150 and then donate that cash. You actually have to donate the asset to the charity. The charity sells it. They don't have to pay taxes on it because they're a qualified charity, but you avoid paying gains

[00:09:00] on those assets. You avoid paying taxes on the games. I should clarify. The key thing here to understand is that your options really are, do I sell my investments? Let's say you didn't have a bunch of cash in the bank. Do I sell my investments, pay taxes on them, and then donate that cash? Or can I donate the investments and then the charity doesn't pay taxes? And that's great. And it works great. The musical chairs that works here is if you donate to the charity, Then take cash you would have given to the charity and buy back the stock. That's something we're going to talk about a little bit later, but that's one strategy to ensure that you're not raiding your investments and your wealth and your retirement as you go about your annual gifting. Right. Yep. And we'll touch on that as well. But some things to be aware of, you do have to hold the asset for at least a year to be able to donate it and get that benefit. Again, you'd want to donate the stock. You don't want to sell it and then donate the cash. There are some limitations for gifting assets. So typically if you were

[00:10:00] to gift cash, 60 percent of your AGI, your adjusted gross income. That's the amount that you can donate. When it comes to donating stocks or appreciated assets, that limit goes down to This actually can vary based on the charity that is receiving your assets as well. So, it's not just whether you're giving cash or appreciated investments. When we say the word appreciated, you probably realize this, but we're talking about investments that have grown. It doesn't just depend on that, it also depends on the type of charity that's receiving the assets. So, be aware of that, just be a little bit careful, but most of the time you can give up to 50 or 60%. of your income level if it's cash and then up to 30 percent of your income level if it's appreciated investments that are not cash. There's a little disclaimer that please look into it. It depends. Those are some numbers to look at. Something else to consider. You do get the value of the asset when it was donated. So 150 stock, you donate it, you get the value of it.

[00:11:00] Obviously stocks are changing their value throughout the day. In between days, it can take a few days for that to process. So just be aware of that. If you're the type of person that you want to know down to the scent, how much you're donating, that's just not the case with donating stocks, because That price is going to fluctuate between transfer time. You can estimate the value of that stock at the time given. Yeah. The official rule for what they're supposed to take as a deduction is the average of the high and the low on that day that it was received. So that's the official rule. Some charities will give you, we received this value and that's really nice because you can just take that value and put it on your tax return. Oftentimes they won't tell you how much it was worth. They'll say, Hey, thanks for the hundred shares of Apple. You have to go back and say, okay, it was received on this date. As a financial advisor, we do this all the time. Somebody will say, hey, I gave these shares, but I don't know how much I should be deducting on my tax return. And we can pull the dates and say, okay, the average of the high and the low on this day was

[00:12:00] this price times 100 shares. You can deduct 12, 000 or something like that. Exactly. So that's how you calculate the donation. You may not get those exact numbers. Something else to be aware of, if you're planning on using this strategy, let's say, okay, I'm going to save all of my donations for this year. I'm planning on donating from my account, giving some stocks in October. Well, let's say markets are down in October, and you don't have enough assets in there that actually have growth and Obviously, you don't want to give away a stock when it's worth less than what you bought it for. You don't have any taxable growth in there. It doesn't make sense to donate it. So a lot of times it can make sense to donate cash instead of the stock at that point and let the stocks recover. So logistically, a way that we often see people do it is they'll Hey, themselves, the donation throughout the year, just keep it in a bank account, set aside. And then at the time of donation, we'll evaluate, okay, how are your stocks doing? Which ones have grown the most? Let's donate those stocks. And then take the cash from your account, buy

[00:13:00] back those same investments that we just gave away. Let's say we just buy back the Apple stock. That's now 150. You just have a new cost basis of 150. So if you turned around and sold the Apple stock, you wouldn't have any taxable growth on there. So you reset your cost basis by doing that. You also fill the hole of Apple, right? Because let's say we just donate our Apple stock every year without replacing it. We have some big holes in your account. Maybe Apple had an important part in your portfolio. The reality, Lara, is a lot of people don't even realize they have a hole. Because a lot of people just buy investments somewhat haphazardly, and they're like, what do you mean a hole? If you have a portfolio that's managed with extreme precision, down to the 0. 01 percent of the portfolio is supposed to be in this type of investment, and we have software. That if a portfolio drifts too far away from its targets, we get alerts, we'll trade it, we'll manage that way. So if we donate a certain amount, let's say that someone has a

[00:14:00] 500, 000 portfolio and they donate 40, 000, which would be a lot, but let's say somebody donated 40, 000 away to charities and it came from five stocks. That portfolio is completely off balance and our software would immediately, it wouldn't trade it, but it would flag it for us and it would tell us, Hey, we need to sell these 20 positions over here to backfill these five that are now at zero and should be at 3 percent and 4 percent and 6 percent whatever of the portfolio. That's something important to realize as you think about donating stocks. That's why it's so nice. For those who are used to giving cash to take the cash and drop it back into the portfolio. And the way that we manage that internally is we notify our trade team, just to give you guys a little bit of what goes on in the kitchen behind the scenes. Right. But. We notify our trade team and we tell them, Hey, client's going to be sending 40, 000 out of the portfolio. It's these positions freeze the account.

[00:15:00] Don't trade with the alerts you're going to get here in just a minute. And then we donate those stocks, put the cash in, communicate back with our trade team and say, good cash is in please backfill stocks and fix the rest of the imbalance that needs to be fixed at that time. And then the trade team will take care of all of that. And it causes the least amount of tax possible. We were trying to save taxes in the first place, right? And then you don't want to let the tax tail wag the dog. So we don't want to leave the portfolio with holes just because we're afraid to sell other things to backfill. And anyway, you get the idea. I want to go back to something you said, Laura, about investments at a loss. Sometimes it's really awkward working sometimes with our CPAs that we have great relationships with because they don't see what is unrealized in the portfolio. They only see what has been sold. So sometimes Ideally, you talked about that investor who had losses only. Ideally, at that time, we're actually selling those positions at a loss because it helps them against their

[00:16:00] income and helps them against future capital gains, right? We're selling a bunch of things at a loss and we're donating away the winners. And the CPAs never see the winners, and they only see the losses, and they're like, You need to get a new financial advisor. When in fact we might be doing, like, the absolute best thing for them. We might be growing their portfolio, and at the same time saving them on taxes. And that's why we think it's really important for a financial advisor and the CPA to work together. Because there truly are some portfolios where that's not happening. They're just losing money. So I don't blame the CPAs for being a little bit curious there. And the fact that they care, that's great. Good for you. But there are times when we're actually doing some really great things. And the portfolio has a couple hundred thousand dollars worth of unrealized gains. Meaning if we sold off everything, they'd have to show 200, 000. But we're just super cautious of that much activity because we don't want to cause them those taxes. And that's another benefit of donating stocks. Maybe you worked with a

[00:17:00] company that you had some stock option plans and you have a ton of stock that you've held for years and years with such a low cost basis. Maybe you got it for 10 and now it's worth 100 a share. And so if you sell those investments to try to diversify, to invest in lots of different things, it's going to set off a lot of capital gains for you. Maybe we keep those separate and we use those to donate to charities each year. So you can avoid paying those gains. So you don't feel as trapped. Some people feel trapped that they can't get out of an investment because it will set off a lot of those unrealized gains. But if you can donate it to a charity, you avoid paying the tax. You take the cash from the account and then you diversify with the cash. You've avoided taxes. You've met your charitable obligations. So it's a win for everybody. From a portfolio management standpoint. It is amazing how often we let taxes drive our investment decisions. And how often the taxes saved were so much less than the investment gain lost. And that's important for people to understand. That's

[00:18:00] what we mean by don't let the tax tail wag the dog. But if we are already going to do something like, for example, sometimes I'll have an annual review with a client. We'll talk about the overall portfolio and realize that they've made really good money, but they're older and it's time to somewhat de risk the portfolio. Meaning maybe there we use risk scores here. In addition to asset allocation. So instead of just saying you're 70 percent stocks, we say you're 70 percent stocks. And as measured on a risk score of one to a hundred with standard deviation, your portfolio scores is 65 or something like that. So we look at both of those and we might determine it's now time to bring them down to a 60 or. Down to a, maybe a 60 percent stock portfolio. If we do that, that's going to cause a bunch of taxes because they've had a lot of gains. So sometimes in that moment, we realize the investment decision is to get more conservative. I'll oftentimes say, okay, pause client. Now, we know that normally we do your charitable giving in December, and it's June,

[00:19:00] but we don't want to wait till December to make these investment changes. Could we donate a few of these stocks today, and not wait until December? We know you're donating anyway, you're a regular tithe payer, you're a regular contributor to the symphony, or something like that, right? We do this every year, what if we set it aside right now and give it away right now? Later in the season, we'll talk about other tools to control the exact timing of your grants, specifically a donor advised fund. But today is, we want to talk more specifically about the idea of giving stocks versus giving cash. And then I also just wanted to throw in The idea of proper portfolio management and having the investment analysis be one. So it goes like this growth, risk, and tax is what I meant to say, not investment. So that's your order. Like you need to think about, I need to figure out how much I need to grow at what cost of risk. And at what cost of tax? That's your order of decision making. So think about your portfolio from an investment

[00:20:00] growth standpoint, and then consider how much risk you're taking to get that growth, and then consider the tax cost. And this whole charitable giving section is part of tax. So moving on, what, Laura, have we not covered? Because I took us off rail into portfolio management and things like that. No, but that's always an important reminder as we talk through taxes. I think that covers most of it. Just to give a recap, remember the difference between standard and itemized. If you donate stocks, you can still itemize your deductions, or if you take the standard, this is still a tax benefit for you. Basically, you can buy an asset, hold it for at least a year, donate it to a charity. If it's grown, you don't have to pay taxes on that growth. The best way is to replace those assets with the cash by buying back the investments, making the changes there. And overall. That's a great way to donate and save on taxes. So next time, if you are a regular charitable giver, you need to listen to our next episode. If you're somewhat sporadic, and it's

[00:21:00] not that much, and you give a couple hundred dollars here and there, probably this next concept of timing your donations. Probably not going to apply to you much, but if you're giving more than five, 10, 000 a year in charity to charities every single year, this next episode is super important. We're going to talk about bunching. We're going to talk about some stories and examples of how people have doubled up and how do you optimize between the standard and the itemized deduction. It'll be a good one. I love this stuff. Like I said earlier, you're going to do good either way. You might as well get some tax benefit from it. Exactly. And some people might wonder, can I do this from an IRA? This type of donating we're talking about is no, but in the third episode, we're going to talk about qualified charitable distributions, that's donating from an IRA. So we'll touch on that in the third episode of the season. Yeah, good point. Just to clarify, so you're saying the concept of giving away stocks, because a lot of people have stocks inside their retirement accounts. I've had that question. I'd love to give some of my stocks within my IRA.

[00:22:00] And you're saying... No, you can't because it's inside an IRA. It doesn't have a cost basis and then growth. It's just all taxable. And then episode 3 covers how to do that. You have to be old enough. Something to look forward to. The only thing, just joking. They actually say people get happier. There's like a smile curve to happiness. Are we at the bottom of the curve? You are still on the upside. The studies show that 40s and 50s can be pretty tough. In your 40s, that's why they call it midlife crisis. But as people age, even though their health declines and their life expectancy declines, they actually get happier. Probably because of QCDs. Just the ability to donate to charities from their IRA. Don't miss it. Don't miss episode three. Okay, thanks guys.  This podcast is intended for informational purpose only and is not a substitute for personal advice from Capita. This is not a recommendation, offer, or solicitation to buy

[00:23:00] or sell any security. Past performance is not indicative of future results. There can be no assurance that investment objectives will be achieved. Different types of investments involve varying degrees of risk, including the loss of money invested. Therefore, It should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or proposed by Capita will be profitable. Further, Capita does not provide legal or Tax advice, please consult with your legal or tax professional for advice prior to implementing any strategies discussed during this podcast. Certain

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