If you want to take the simplest view of your income, it would be: Money comes in and money goes out. In reality, it is a little more detailed than that. Income typically flows into five places:
- Your daily living expenses
- Charitable giving
- Consumer debt
- Investments and savings
This is easier to remember if you think about where your income flows as if they were pieces of a big pie: Live, give, owe (debt and taxes), and grow.
Separate and Interrelated
While you may deal with each of these components individually, they are connected with each other more than you may realize. For example:
- Higher living expenses reduce your ability to make charitable or investing contributions
- Increasing taxes decrease your ability to put money toward any other area
- Growing debt shrinks your ability to save for a child’s education, your retirement or another financial goal
- The more money you need for living and paying off debt, the less money there is to save
At first glance, this picture seems challenging at best. After all, everything seems to go up in price. All you need to do is step into a supermarket or price a new vehicle to see how everyday living expenses have exploded, and you never know when tax rates will increase.
The Parable of the Talents
But what if there were ways to get around this problem? Boosting giving and improving income aren’t mutually exclusive, if you are thoughtful about your execution. The lessons of the Parable of the Talents (Matthew 25:14-30) can help you make the most of your talents or gifts – in this case, your income – to give to those in need while you and your family benefit in the process.
Let’s look at three ways – three financial vehicles or techniques – in which you can increase your giving and receive more in return, however altruistic your giving may be. In most cases, you’ll find that the tax rules governing the following scenarios will leave you with more money to live and give.
Supercharge Your RMDs
If you take retirement distributions, you may know that you must begin taking what’s known as “required minimum distributions” (RMDs) by age 72 (or age 70 ½ if born before January 1, 2020). U.S. tax code makes it difficult to leave a traditional IRA balance to loved ones after you’re gone by imposing a 50% penalty tax on the required distribution that you don’t take each year.
You can get around this hurdle and help others, too, by giving QCDs for RMDs. If you are at least age 70 ½, you can generally give up to $100,000 to a qualified charitable organization (QCD) – or $200,000 if you contribute jointly with a spouse.
This is a great strategy if you don’t need the distributions from these funds in a given year, and it will reduce the amount of income tax you’ll pay in a given year because your QCD isn’t included in your income. Additionally, transferring a gift this size from your IRA can reduce future RMDs, because you have reduced your retirement account balance.
Appreciating Appreciated Securities
Another way to plump up your charitable giving in a tax-favored way is to give appreciated securities instead of cash to your church or other qualified charity. According to the IRS, if you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made.
Generally, the sale of a security owned for at least one year triggers capital gains taxes. In this case, you would pay the tax on any gain (or receive a credit for any loss). But if you give this security directly to a qualified charity instead, you won’t pay capital gains tax on the donation.
This, in effect, leaves you with more money to give. If you had cashed in, say, $100,000 in stock gains and paid a 20% capital gains tax, you would give $80,000 after tax. By taking advantage of this tax law, you increase your charitable giving because you decreased your taxes without sacrificing your living.
Investing to Give More
Another way to use investing to give more is by putting your money into a donor-advised fund, a tax-free account from which you can give to qualified charitable organizations. Your contributions are immediately tax-free, reducing your taxable income or capital gains.
You can contribute anything to a donor-advised fund: money, securities, collectibles and even interest in a private business. Potential growth is tax-free, as are distributions. You can contribute to multiple charities from this fund, and may typically put your investment into your choice from a wide assortment of mutual funds.
Even if you give altruistically, you’ll still have more money to live on and invest for you and loved ones’ future. Make sure, though, that you carefully consider this decision, because it is irrevocable.
Benefits Now and Forever
These are just some of the ways you can use tax rules to live, give, owe (or not owe) and grow. As Jesus instructed in the Parable of the Talents, Living a life of maximum impact with what God entrusts us with brings blessings and joy that are eternal.