Breaking the Code: Charitable Contributions
By: Christopher Archambault, MBA, CFP®
As the year-end approaches, many clients revisit charitable contributions and giving for the year. With the changes to the tax code that are in effect for 2018, it may change how many taxpayers approach giving from a tax planning standpoint.
With the increased standard deduction ($12,000 single; $24,000 married filing jointly), charitable contributions may not have a tax benefit for as many taxpayers as a result of the limitations on certain itemized deductions (primarily state & local taxes paid). Generally speaking, the following deductions are the most common in determining whether or not a taxpayer will itemize: state & local taxes paid (capped at $10,000); qualified mortgage interest; charitable contributions; and medical expenses (above a certain “floor” based on income for that tax year).
There are a number of strategies to ensure that your charitable deductions still have some tax benefit:
“Bunching” Charitable Donations:
Taxpayers who are on the cusp of itemizing deductions may consider making a couple years’ worth of charitable deductions in one year to put them over the itemized threshold and in subsequent year(s) elect to take the standard deduction.
Use of Donor Advised Funds:
In combination with the “bunching strategy”, taxpayers may utilize a donor advised fund to efficiently facilitate charitable giving. A donor advised fund (DAF) is a general charitable account that you fund with either cash or stock (and is a qualified charitable organization itself). The tax deduction occurs when you fund the DAF; after funding, the donor is able to instruct the custodian to disperse the funds to specific public charities which they would like to support. Typically, these disbursements can occur over a number of years. One of the greatest advantages to a DAF is funding with appreciated stock. The IRS allows a taxpayer to donate appreciated stock to a DAF without realizing the capital gain and also benefiting from the full tax deduction based on the fair market value of the stock. For the appreciated security to qualify for the full fair market value, it must be held by the taxpayer for more than one year.
Qualified Charitable Distribution (IRA):
If you are over 70 ½ years old and have an IRA account, you can elect to make a distribution from your IRA directly to charity (up to $100,000 per year). This has multiple benefits: it counts toward your current year’s Required Minimum Distribution (RMD) and is also not included in your taxable income. The exclusion from taxable income is especially beneficial to those who may not be itemizing deductions and otherwise would have no tax benefit for charitable contributions. In addition, this method also reduces adjusted gross income, which may be beneficial in the deductibility of medical expenses, taxability of social security, and net investment income tax thresholds. Depending on the state, some allow for this exclusion as well, which is an added benefit.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.