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Notes Along the Path: May 2021

Notes Along the Path: May 2021

May 05, 2021
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Dear Friends,

Welcome to another edition of Notes Along the Path!

This month's topics:

  • 7 Charitable Giving Missteps to Avoid
  • Higher Taxes on Capital Gains, Should You Be Worried?
  • April's Stock Market: Pleasant as a Sunny Spring Day, Plus Cloudy Outlook on Infrastructure Bill Might Bring Showers.

Please consider sharing this with someone you know who might be asking themselves (or you!) questions about their financial future.

7 Charitable Giving Missteps to Avoid

Individuals gave an estimated $309.7 billion, up 4.7% in 2019 versus the prior year. Foundations added an estimated $75.7 billion, while another $43.2 billion was given by endowments.

We tend to think about charitable donations around the holidays. It's year-end, and your gift to a charity may be sparked not only by your desire to help others but by tax planning strategies.

The standard deduction is much larger today thanks to 2018's tax changes, which reduced the incentive to give for many households. Gifts to a charity can only reduce your tax bill if you itemize when filing, and far fewer itemize under the new rules. If you were unable to itemize, 2020 came with a small concession. You could deduct up to $300 of cash donations without having to itemize.

Of course, your gifts will not qualify for a tax deduction unless they are received by a tax-exempt organization, as defined by section 501(c)(3) of the Internal Revenue Code. For example, making donations to a personal fundraiser through GoFundMe is growing increasingly common, but they are not tax-deductible.

While making sure your gift is tax-deductible is one challenge, there are others you'll need to navigate, too.

Let's review seven potential potholes, both "Do's" and "Don'ts," to avoid when it comes to charitable giving.

  1. Don't Spread limited dollars over too many causes: I call this "trying to butter everyone's bread." There are plenty of worthy charities. However, it might be a good idea to concentrate your limited resources on causes you are most passionate about and give to a limited number of organizations working in that arena. The choices are almost limitless. Your resources are not.
  1. Don't Fail to get the best return: You've found charities that meet your criteria. For many, we want the best return on our dollar. We want our cash to be spent and invested wisely, not frittered away by high administrative costs.

According to CharityWatch, "Ask how much of your donation goes for general administration and fundraising expenses and how much is left for the program services you want to support. Most highly efficient charities spend 75% or more on programs.

"Keep in mind that newer groups and those that are working on less popular issues may find it necessary to spend a greater percentage on fundraising and administrative costs than well-established, popular groups."

According to Smart Asset, which reviewed a report by the Tampa Bay Times and The Center for Investigative Reporting, 50 charities collected more than $1.35 billion in donations. Yet, $970 million went not to worthy recipients but to the people who collected the money.

You desire to support your cause, not enrich the fundraisers.

A small effort on your part, i.e., "kicking the tires" of the charity, will go a long way. There are several charity watchdogs you can find online. Do your homework. You may find your decision reinforced by what you find. Or you may decide to steer clear of a particular organization based on your research.

  1. Skip the middleman. Give directly to the charity and avoid solicitors. The middleman gets paid to raise funds. That's a haircut on your donation you will want to avoid.
  1. Steer clear of emotional appeals. This is tricky because we want to help. We feel good about ourselves when we share our blessings with others who are less fortunate. It's part of who we are. Emotional appeals pull at our heartstrings. No one, including myself, is immune to what appear to be worthy charities. Just be careful. You may want to concentrate on causes that have special meaning to you.

Furthermore, be careful about what might be called the flavor of the month. For instance, when a disaster occurs, there are reputable outfits we are all familiar with. 

  1. Don't wait until the last minute. Many nonprofits get a big chunk of cash at year-end. If possible, you can set up monthly payments that help even out the cash flow of these organizations, making it easier on their budgets—and your finances. 
  1. Rethink the small donation. Ten dollars is ten dollars, and plenty of ten-dollar donations will add up, but processing costs for the charity are high. Besides, if you give once, you'll probably be inundated by requests that raise a nonprofit's costs, diluting the impact of your one-time gift. 
  1. Don't fail to develop a strategy. As I've said, we are tempted to respond when we hear a well-crafted message. Sometimes, it is a worthy cause. Our desire to help is admirable, and it speaks volumes about who we, but be careful about exhausting limited finances and reducing donations to causes you care about the most. Think about a target amount to give for the year and stick to your plan.

Bonus from having a plan: when a solicitor gets through your defenses and has you on the phone, you can honestly say, "I have a budget for the year, and all of my donations have already been allocated to other organizations."


Will you be paying higher taxes on your capital gains?

The short answer is almost certainly "No." The longer answer is, "I don't know" because tax hikes proposed by the President may or may not be enacted into law by Congress.

Last month, President Joe Biden unveiled The American Families Plan, which among other things, proposes to raise capital gains taxes on long-term capital gains—on the sale of assets held more than one year—for households earning more than $1 million in income.

This change won't affect most people, at least directly. I don't plan on diving into the economics behind the proposal. But in case the plan becomes law, let's look at ways to use tax planning strategies to avoid or lessen the impact.

Thanks to a stronger economy, the successful rollout of the vaccines, meager interest rates, and more, stocks have rallied sharply over the last year. You have benefited, but the sale of an asset could create a tax liability, depending on your tax bracket and how long you've held the asset.

Today, the maximum long-term rate on capital gains is 20% plus the 3.8% net investment income (NNI) tax on certain income.

But if you earn more than $1 million in any one year, listen up.

Currently, ordinary income is taxed no higher than 37.0%. That could rise to 39.6% if the President's plan is approved. If you earn over $1 million, you may pay that 39.6% rate on the sale of assets held over one year plus the 3.8% NII tax.

How might we lessen the impact, assuming we see a significant increase in the capital gains rate?

  1. If a higher rate is not made retroactive, we can consider recognizing profits in tax year 2021, thus avoiding the new rate. Further, we step up the cost basis.
  1. Another way to sidestep the tax is to simply avoid large asset sales in taxable accounts, assuming there isn't a compelling reason to do so. The only constant in tax law is change, and a future Congress and President could adjust the rates again.

However, there is an important caveat: the time-honored tradition of passing on assets to heirs without paying taxes could be in jeopardy, which most of you know as the stepped-up basis at death.  In his proposal, the President wants to trigger taxes on unrealized gains passed to heirs. This would occur after a $1 million exemption.

  1. We can also strategically time the sale of assets, making sure we do not pass the $1 million limit on income. That would ensure the maximum federal rate paid would remain 20% plus the 3.8% NII tax. It's a far cry from 43.4%.

In a perfect world, we would not allow the tail (tax planning) to wag the dog (investment planning). But tax laws and tax planning do affect investment planning.

President Biden's proposals are a long way from being enacted into law. They will likely be modified in Congress before any bill is signed into law. I will be closely monitoring the situation. We can become more proactive when we have a better idea of how everything will shake out.

As always, we encourage you to consult with your tax advisor before implementing any tax strategies.

Growth Springs Eternal for April '21 Stock Market

For the third month in a row, the stock market logged gains in all the key indexes other than emerging markets.

My optimism is somewhat tempered as I write this due to the possibility that the Senate may substantially water down the President's infrastructure package.

I have always said that public investment is the key to long-term economic growth. But since 1980 we have spent less on this critical priority than our competitor industrialized nations in Europe and Asia.  

How infrastructure is funded does nothing to change its need.  You may have heard me say something like, "If someone is willing to lend you a trillion dollars at 2% interest, and you can invest it in something that pays far more than that, it's insane not to take that offer as many times as you can." 

That strategy is how banks make money.  They borrow money (take deposits) and pay interest at a low rate; then, they invest the cash in things that pay a higher rate. It's the very foundation of capitalism.

The Economic Policy Institute estimates that $100 billion of infrastructure spending creates 1 million new jobs, so $1 trillion should produce 10 million jobs, which would be an expansion of over 6% to the current labor force.  If we assume that more jobs lead to more output (a safe assumption although the ratio may not be precisely 1:1), it is plain to see that is an excellent investment for the country.

I trust you've found this review to be educational and informative.

If you have any questions or would like to discuss any matters, please feel free to give me a call.

If you like it this newsletter I encourage you to pass it on to any contacts you have that might benefit.


I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.

All the Best!

Gordon Achtermann
T: 703-573-7325