In December 2017, the Tax Cuts and Jobs Act became law. This new law created sweeping changes to the tax code that has impacted the landscape for charitable giving. For example, the standard deduction has been greatly increased, whereas some itemized deductions have been reduced or eliminated. While tax deductions are not the sole motivating factor behind charitable giving, they are a nice added benefit. If you itemize your deductions instead of taking the standard deduction, they can help reduce your tax bill.
I know by this time of the year tax fatigue has set in and many households have closed the books on the 2018 tax year. This is also a great time to evaluate your charitable giving in 2018 and decide whether you need to make any adjustments for 2019. Asking yourself some simple questions can help narrow the appropriate charitable giving options in order to maximize the impact of your gift. For example, are you 70 ½ and own a Traditional IRA or an Inherited IRA? Do you own highly appreciated stock in a taxable account that you would like to sell? How much are you planning to give? Do you anticipate exceeding the standard deduction limit in 2019? The chart below lists the standard deductions by filing status.
2019 Standard Deduction
Qualified Charitable Distribution
In most cases, the charitable giving strategy that offers the biggest bang for the buck is the Qualified Charitable Distribution (QCD). Regardless of whether you itemize or take the standard deduction, QCD’s are not credited as charitable deductions. However, if the distribution rules are adhered to, the withdrawals are not counted as taxable income in the first place. They are applicable to the year’s required minimum distribution. QCD’s must come from a Traditional IRA or an Inherited IRA where the owner is 70 ½ or older. They cannot be made from employer-sponsored retirement accounts, like a Simple IRA or SEP IRA. The gift must be sent directly to a qualified 501(c)(3) charity from the IRA custodian. The maximum annual distribution amount that can qualify for a QCD is $100,000 per IRA owner. Distributions can be made to multiple organizations provided that the total of all the distributions stay within the annual limit. Also, there is no carryover provision for any portion of the $100,000 annual limitation not used in a given year.
The traditional and less restrictive charitable giving strategy would be to donate appreciated stock directly to a qualified charity. This strategy potentially offers a double benefit. First, the donor avoids the capital gains tax they would have incurred had they chosen to sell the stock instead of donating. Secondly, the gifted security may qualify for a deduction if the donor itemized instead of taking the standard deduction. The IRS limits charitable deductions to 30% of Adjusted Gross Income for gifts made to public charities and 20% for private charities.
Bunching or Grouping Charitable Gifts
For taxpayers who don’t have an IRA with a required minimum distribution or own highly appreciated stock, the increased standard deduction limit has greatly reduced the ability to make outright gifts in a tax efficient manner. A less restrictive and tax efficient giving strategy used in order to overcome the standard deduction hurdle is “bunching” charitable gifts. Bunching is to consolidate gifts and other deductions only into certain years, with little or no giving in other years. Under this strategy, taxpayers itemize their deductions in the “bunched” years while taking the standard deduction in non-bunched years.
A vehicle that has been designed to assist with this bunching strategy is a donor-advised fund or DAF. Donor-advised funds can be funded with cash or appreciated securities. Appreciated securities make ideal candidates to be contributed, since the owner will escape the capital gains tax and receive a tax deduction. A unique feature of donor-advised funds is that the contribution is recognized when the account is funded. A taxpayer would claim a charitable tax deduction in the year in which the donation was made to the donor-advised fund. The fund is then used to make distributions to multiple qualified charities over the years as the donor sees fit. Think of it as a private foundation, but with less cost and complexity.
Since tax situations vary, taxpayers should seek the guidance of tax advisers when comparing the different charitable giving strategies. In the end, keep in mind that regardless of the tax deductibility of your donation, it will greatly impact the charities that are important to you. Also, please reach out to Provident if there is any way we may assist you in implementing your chosen strategy.
Dan Krstevski, CFP®