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May 23, 2025 No Comments

A Guide to Tax Efficient Charitable Giving

I have recently joined the board of directors of The Glen Ellyn Library Foundation. It’s an organization that is near and dear to my family. This led me to write this article about tax-efficient charitable giving. For those who are charitable minded, hopefully these ideas can help maximize your donations, and help lighten the load on your tax bill. The main takeaway is that writing a check or giving cash is rarely the most efficient way to donate.

Here’s a look at some of the most effective strategies for tax-efficient charitable giving:

Donating Appreciated Assets (Stocks, Mutual Funds, Real Estate)

One of the most powerful ways to give is by donating appreciated non-cash assets, such as stocks, mutual funds, or even real estate, that you’ve held for more than a year. This strategy offers a double tax benefit:

Avoid Capital Gains Tax: If you were to sell these assets yourself, you’d owe capital gains tax on the appreciation. By donating them directly to a qualified charity, you avoid this tax entirely, meaning more of your original investment goes to the cause.
Charitable Deduction: You can typically deduct the full fair market value of the appreciated asset on your tax return, subject to IRS limitations, up to 30% of your Adjusted Gross Income, with a five-year carryover for any excess.

How it works: Instead of selling your highly appreciated stock and donating the cash proceeds (which would trigger capital gains), you transfer the shares directly to the charity. The charity then sells the shares, receiving the full value, and you get the tax benefits.

Donor-Advised Funds (DAFs)

Donor-Advised Funds are increasingly popular for their flexibility and tax advantages. A DAF is a charitable giving account established at a financial institution.

Immediate Tax Deduction, Flexible Grantmaking: You contribute cash, appreciated securities, or other assets to the DAF and receive an immediate tax deduction in the year of the contribution. The funds are then invested and can grow tax-free. You can recommend grants to your favorite qualified charities over time, without a deadline. This allows you to “bunch” several years’ worth of donations into one tax year to exceed the standard deduction, while still distributing funds to charities as you wish.
Simplified Record-Keeping: If you regularly give to multiple nonprofits, a DAF streamlines your giving, providing a single tax receipt for all your contributions to the fund.

Qualified Charitable Distributions (QCDs)

For individuals aged 70½ or older, a Qualified Charitable Distribution (QCD) can be a highly effective giving strategy, especially if you take Required Minimum Distributions (RMDs) from your IRA.

Tax-Free Transfer: You can instruct your IRA custodian to transfer up to $108,000 (for 2025, subject to annual inflation adjustments) directly from your IRA to a qualified charity. This distribution is excluded from your taxable income, even if it fulfills part or all of your RMD.
Lower Adjusted Gross Income (AGI): Since the QCD isn’t included in your AGI, it can help reduce your overall taxable income, potentially keeping you in a lower tax bracket and impacting other tax-related calculations, such as Medicare premiums.
No Itemization Required: Unlike other charitable deductions, the benefit of a QCD is realized regardless of whether you itemize deductions on your tax return.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust is an irrevocable trust that allows you to donate assets to charity while retaining an income stream for yourself or other beneficiaries for a specified term (up to 20 years) or for life. Keep in mind that you will probably need to enlist the help of an attorney to setup a CRT.

Income Stream & Tax Deduction: You receive an immediate partial income tax deduction for the present value of the assets estimated to go to charity at the end of the trust term. Meanwhile, the trust pays you an annual income stream.
Avoid Capital Gains: Similar to direct donations of appreciated assets, contributing appreciated assets to a CRT allows you to avoid immediate capital gains tax on those assets when they are eventually sold within the trust.
Estate Tax Reduction: Assets placed in a CRT are removed from your taxable estate, potentially reducing your estate tax liability.

By understanding and utilizing these tax-efficient giving strategies, you can significantly enhance the impact of your charitable contributions, benefiting both your chosen causes and your pocketbook.

If you think that you want to use any of these ideas, reach out to me, and I can help walk you through them.

Current Interest Rates

October 25, 2024 No Comments

The Federal Reserve has begun lowering short-term interest rates, as expected. They started with a 1/2 percent cut and are expected to continue to lower rates through 2025. Longer-term rates went lower in anticipation of these cuts, but have since gone higher.

The 10 year US Note had gone below 3.65%, but is now sitting at 4.21%. This can be attributed to stronger than expected economic data and concerns that neither candidate in next month’s presidential election seems concerned about the federal deficit or debt.

Looking at the data below makes me think that the best value right now is in intermediate and longer-term municipal bonds. Interest from municipal bonds are typically free from federal taxes. In almost all states, if you buy bonds in the state that you live, that interest is also not taxed. I used a 30% total tax rate for the comparisons below, 24% Federal and 6% State. The higher your income and tax rate, the more valuable that interest free income is worth.

Interest Rates That You Receive

	1 Year	5 Years	10 Years	20+ Years
US Government Bonds	4.30%	4.07%	4.21%	4.62%
High Quality Municipal Bonds	3.05%	3.50%	4.15%	4.5%
Municipal Bonds- Tax Equivalent	4.36%	5.00%	5.92%	6.43%
CDs	4.10%	3.90%	4.05%	N/A
High Quality Corporate Bonds	4.50%	5.00%	5.30%	5.60%

Interest and Dividends From Funds

High Yield Corporate Bond Fund	6.65%
Preferred Stock Fund	6.07%
High Quality Dividend Stocks	4.25%

Interest Rates That You Have to Pay

30 Year Mortgage	6.75%
15 Year Mortgage	6.00%
Credit Card APR	23.37%

Current Stock Market Valuations

August 30, 2024 No Comments

Stock market indexes have had a tremendous run since the lows of October 2022. The S&P 500 has gained around 60% in less than two years. The annualized return since that low has been an astonishing 28.5%, far outpacing the historical gain of about 10% per year. If these returns were the norm, I would have a very easy job.

The Price/Earnings Ratio, or PE ratio, tells you how much you are paying for each dollar of earnings of a stock or stock market index. The current PE ratio for expected earnings of the S&P for the next year is about 21. The chart below shows where that falls over the past 10 years. We are 8.2% over the five-year average and 17.3% over the ten-year average.

To justify a higher earnings multiple, one of two things have to happen:

Option 1 is that companies grow their earnings at a greater pace than normal. Earnings growth for the S&P is projected to be 16% by the end of 2025. Those are lofty expectations as the historical average is around 10%. A lot of earnings growth is expected from the adoption of Artificial Intelligence, so this very well may happen.

Option 2 is that the stock market will have subpar returns over the intermediate future. Currently, the market is justifying its higher than average Price/Earnings ratio because of that higher than expected earnings growth.

I’m not necessarily calling for a stock market crash, but I am being a little cautious. Long-term time horizons smooth out risk. Selling out of stocks now with the idea of buying them back at a cheaper price is usually a loser’s game. Selling appreciated assets also creates capital gains. Many clients have significant capital gains. It simply doesn’t make sense to sell your holdings and pay taxes, hoping to buy them back a little lower. August through October is on average the weakest stretch of the year. That being said, I am taking my time with any new money or cash coming from bonds that normally would be allocated to stocks. Rest assured, your allocations will soon be where they need to be. With risk-free government bonds paying around 5%, I just may take some extra getting there.

The Case for Individual Bonds

June 12, 2024 No Comments

Exchange Traded Funds (ETFs) are fantastic investment products that provide diversification at a relative low cost to investors. These funds can hold stocks, bonds, real estate, gold, or about any kind of investment you can think of. I use them for my clients and myself. However, when it comes to fixed income products there are some important reasons to consider using high grade individual bonds and CDs for your portfolio.

Predictability:

When you buy an individual bond, you know much you’re paying for it, how much it’s paying you, and how much you will receive when the bond is due. A steady stream of income can be created from several different individual bonds. This predictability can be particularly valuable for retirees relying on bond income to cover living expenses.

It is also helpful when you know a large expenditure is coming. Whether that is buying a house, paying for college, or any large ticket item, individual bonds can take the guess work out of returns. For example, you can buy a US Government Treasury or CD that comes due right before the date that you need the funds

Less Volatility:

Most bond funds have a target duration or time frame that they want to hold bonds. For example, the fund may target bonds that come due in about 10 years. To achieve is, they will usually own a collection of bonds that have 8 to 12 years until they are due. As time goes by and a bond has less than 8 years left, it will be sold and replaced by a bond that has 10-12 years left. They then go out and buy the best bonds for their fund. They are at the mercy of where current interest rates are at the time. This can lead to more inconsistent returns. Most bonds funds that aren’t very short-term funds don’t hold any bonds to maturity. This isn’t a criticism. It’s just how those funds work.

The strategy of using individual fixed income products works best using Certificates of Deposit or very high grade bonds, such as United States Government Treasuries and highly rated Municipal and Corporate Bonds. This greatly reduces risk of default. When it comes to lower grade and higher yield bonds, diversifying is very important. That’s why I do use ETFs for higher yield bonds. That’s when it’s better to pay them a small fee to own hundreds, or thousands, of different bonds from different issuers.

Avoiding Fund Fees and Expenses:

Bond funds typically charge management fees and expenses, which can erode investors’ returns over time. Most of the bond ETFs that I use charge very low fees, but they can add up over the long term, especially in periods of lower interest rates or market volatility. By investing in individual bonds, investors can bypass these fees and improve their overall returns.

Conclusion:

Building a fixed income portfolio is like putting together a puzzle. How much income is needed? How will this income be taxed? How much risk should I take? Diversification provided by ETFs is integral, but allocating at least some of your portfolio to individual bonds will take out some of the guesswork when you’re trying to solve your income needs.