That’s What It’s For!
This is the text message I received last night from a client. "Can I give it away?" I suppose some context is in order. This client has done a remarkable job over the last five years. They've budgeted well, lived intentionally, pursued work that matters, given with purpose, and invested patiently. One of the practices they've established in their life is a disciplined commitment to taxable investing. If you're a client, you know I beat this dead horse dead-er. I believe taxable investing is one of the most overlooked, neglected, misunderstood, and whiffed opportunities in personal finance today. This client, however, immediately embraced the concept way back when we started meeting. Each month, a portion of their money automatically gets contributed to their taxable investment account. They don't think much about it. They don't lose sleep over it. They rarely even check it. It just happens.
The stock market had a killer day yesterday. It rose by 1.23% in a single day, to yet another all-time high. This is an eye-catching type of day, which somehow caught the eye of this couple. This is where my text exchange begins. They excitedly and somewhat confusingly texted me, saying their investment account shows they made $9,000 just yesterday. They couldn't believe it. $9,000 in one day!?!? Yes, correct. That's the beauty of investing the right way. It feels like nothing. Then nothing. Still nothing. But one day, off in the future (hello future you!), it's everything.
Astounded by this new development, their gut reaction was, "Can I give it away?" That text made my day. "Yes, of course you can! That's what it's for." Again, this is the beauty of taxable investing. This money gets invested intentionally, but its fate remains in the air. They could use it for retirement, kids college, supplemental income, a new car, a home improvement project, a vacation, starting a company/organization, or outrageous giving. Everything is on the table.
After ripping open the doors for generosity, I revealed to them there's another beautiful nuance to it. If they directly give their investment to a registered 501(c)(3) organization (like a church or non-profit), they don't owe a penny of taxes. That's right. 100% of the investment goes to the organization, they owe zero taxes, and can deduct the entire gift on their taxes (if they itemize).
Here's an example. A $3,000 investment grows to $10,000. Assuming it's been held for at least 365 days, they qualify for long-term capital gain tax rates. For most families, that means they would owe a 15% tax on the $7,000 of growth, or $1,050. Instead of selling this investment, they can just give the entire $10,000 investment directly to the organization, the $1,050 of taxes goes away, and they can even report the $10,000 gift as a deduction on their taxes (if they itemize). Win, win, win. Of course, they could always just sell the investment, pay the taxes, and give that money directly to an organization or someone in need.
They are going to have fun with this.....