Now that the 2017 tax season is a wrap for most Americans, it’s time to start contemplating how the 2017 Tax Cuts and Jobs Act (TCJA) will impact your current and future tax plans. One of the frequently asked questions we’ve been fielding is on charitable giving: 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.
1. Stagger Your Giving
Technically, you can still itemize charitable deductions. However, it’s now much more difficult to benefit from doing so annually. The TCJA not only restricts or eliminates several other formerly itemizable write-offs, it essentially 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 will usually decide they’re better off taking the standard deduction instead – even though it means they’ll receive no tax benefit for their charitable giving that year. 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 … and so on.
2. Unload a Highly Appreciated Holding
If you’re going to be donating anyway, consider doing so with 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:
1. 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.
2. You avoid capital gains tax on the unrealized gain.
3. The charity is free to keep or sell the holding, also without incurring taxable gains.
3. Do a Donor-Advised Fund
Here’s a quick take on how they work:
- Make an irrevocable donation to a DAF sponsor, which acts like a “charitable bank.” The full amount of your donation is deductible in the year you fund the DAF. Plus, many DAFs accept in-kind holdings as described above (whereas not all individual charities can).
- Over time, you advise the DAF’s sponsoring organization on when and to whom to grant the assets. 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.
- Until the funds are distributed, the DAF sponsor typically invests the donated assets; any returns or appreciated value grows tax-free, giving your initial donation added impact.
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. Plus, you can fund your DAF using appreciated holdings.
In short, DAFs can be a handy giving tool. That said, they aren’t ideal for every donor, every time. Let us know if we can show or tell you more.
4. Retirees: Donate Your Required Minimum Distribution
Again, if you’d be making charitable contributions anyway, it may well be tax-wise to donate your Required Minimum Distribution (RMD) as allowed by the IRS, 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, to be exact – you must begin taking RMDs from your tax-sheltered havens, whether or not you want to. 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. As a service to our clients, we are happy to arrange a group meeting among you, your accountant and a member of our firm to offer personalized advice and to best coordinate our efforts on your behalf. We’re also available for planning conversations or to answer additional questions you may have about your tax-wise giving goals.