The 2017 Tax Cuts and Jobs Act (TCJA) had a major impact on charitable giving. One of the frequently asked questions we’ve been fielding is: How can you keep giving, and get a little back on your taxes? Following are four practical possibilities to consider for charitable giving under the TCJA rules.
Stagger Your Giving
Under the TCJA, you can still itemize charitable deductions. However, it is now much more difficult to benefit from doing so annually. The TCJA not only restricts or eliminates several other formerly itemizable write-offs, it doubles the standard deduction to $24,000 for couples filing jointly and $12,000 for single individuals.
As a result, many families who used to itemize and realize tax benefits from their deductible donations may decide they’re better off taking the standard deduction instead – even though it means they’ll receive no tax benefit for their charitable giving. In February 2018, the National Council of Nonprofits estimated that the higher standard deductions would effectively put the charitable deduction “out of reach of more than 87% of taxpayers.”
A possible work-around is to stagger your giving and other deductible expenses. For example, you may be able to double up your charitable giving every other year, in an effort to itemize in alternate years. In year one, give twice as much as you normally would if you can combine it with enough other deductibles to itemize and write off the expenses against taxes due. In year two, do what you can to minimize donations and other deductibles, and take the standard deduction instead. In a nutshell, you’re giving bigger amounts less frequently, essentially “bunching” your donations and deductions to meet higher thresholds.
Unload a Highly Appreciated Holding
Consider giving highly appreciated securities like stocks, stock funds, property, or similar holdings that are worth considerably more than when you acquired them. If you sell a highly appreciated holding outside of a tax-sheltered account (such as an IRA), you’ll pay capital gains taxes on the difference between its cost and its sale price, less expenses. If you instead donate it “in kind” to a non-profit organization (i.e., without selling it first), you triple its tax-wise potentials:
- Within the parameters described above plus a cap based on your Adjusted Gross Income, the holding’s full value is available to you as a charitable deduction in the year you donate it.
- You avoid capital gains tax on the unrealized gain.
- The charity is free to keep or sell the holding without incurring taxable gains.
Do a Donor-Advised Fund (DAF)
DAFs are not new; they’ve been around since the 1930s. But they’ve been garnering more attention as a potentially appropriate tax-planning tool under the TCJA. Here’s how they work:
- Make an irrevocable donation to a DAF sponsor. Many DAFs accept in-kind holdings as described above (whereas not all individual charities can). DAFs are established by nonprofit sponsoring organizations, which act like a “charitable bank,” so the entire contribution is available for the maximum allowable deduction in the year you make it. Once you’ve funded a DAF, the sponsor typically invests the assets, and any returns they earn are tax-free. This can give your initial donation more giving-power over time.
- Participate in granting DAF assets to your charities of choice. Over time, and as the name “donor-advised fund” suggests, you get to advise the DAF’s sponsoring organization on when to grant assets, and where those grants will go. The DAF sponsor has final say, but you can expect they’ll honor your request unless your intended recipient is not a qualified charity or there are other unusual circumstances.
In this manner, a Donor-Advised Fund (DAF) can help you stagger your charitable donation deduction as described above, without having to stagger your usual annual giving. For example, you could fund a DAF with five years’ worth of anticipated donations, and then make annual requests that donations be made to your charities of choice across five years. This should allow you to itemize the entire DAF donation in year 1, and take the standard deduction the rest of the time.
DAFs can be a handy giving tool. That said, they aren’t ideal for every donor, every time. Let us know if we can tell you more.
Retirees: Donate Your Required Minimum Distribution
If you would be making charitable contributions anyway, it may be tax-wise to donate some or all of your Required Minimum Distribution (RMD) instead of taking it as ordinary income.
During your working years, there are many advantages to funding tax-favored retirement accounts. But, eventually, when you reach age 70½, you must begin taking RMDs from your tax-sheltered havens, whether or not you need the income. There is a steep penalty if you fail to do so (with Roth IRAs being an exception to this rule).
RMDs are taxed the year you take them at your ordinary income tax rate. You can avoid extra taxes and higher taxable income (which may impact your Medicare premiums and have tax ramifications on your Social Security income) by donating some or all of your RMD to charity. The IRS allows you to donate up to $100,000 annually in this manner.
No New, But Possibly Improved Opportunities
It’s worth mentioning that none of these four tax-planning possibilities are new; they’ve all been available well before the TCJA passed. The difference is, they may be more applicable to you under the new tax codes.
As we always do with tax topics, we recommend touching base with your tax professional before making any big decisions.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.