When the Tax Cuts and Jobs Act of 2017 doubled the standard deduction and removed or reduced many deductions, the tax appeal of year-end charitable donations came under question. Many people anticipate year-end giving to give something back to the community while reducing their taxable income at the same time. There is certainly no rule against continuing year-end charitable giving, although the tax benefits are significantly lessened. Or are they?
Taxpayers who are charitably inclined and still want to save on taxes should consider using these strategies to achieve both goals.
Bunching Charitable Deductions
This strategy works well for taxpayers who are on the border between taking the standard deduction and itemizing. When bunching charitable deductions, essentially you are making two years’ worth of charitable donations in the same tax year, thereby pushing your itemized deductions past the threshold for the standard deduction. Then, in 2019, plan to take the standard deduction without the additional charitable contribution. This strategy works well for taxpayers but is probably less popular with nonprofit organizations that rely on predictable yearly donations.
If bunching charitable deductions isn’t appealing, another option to consider is a donor-advised fund. To establish a donor-advised fund, you’ll need to work with a financial services firm, independent philanthropic group, community foundation, or an individual organization (like a hospital or university). With this charitable giving strategy, you contribute assets to the fund, then decide how and when to distribute the proceeds.
You can contribute cash, mutual funds, publicly traded securities, restricted stock, privately held business interests, retirement accounts, and in some cases collectibles, personal property, and cryptocurrency. Once inside your fund, you can invest the assets as you see fit, and distribute grants to the nonprofit organization accordingly. You can deduct the entire amount of your charitable contribution in the year you make it without emptying your fund, thereby keeping a “reserve” for future charitable donations while your money continues to grow.
There are restrictions, like minimum balance requirements, limits on subsequent charitable contributions, and there are usually fees to maintain recordkeeping.
One option that is still available and accomplishes dual goals of charitable giving and managing retirement funds is the tax-free IRA distribution. Once you reach age 70 ½, if you have a traditional IRA you are subject to required minimum distributions. If you don’t need the money but don’t want to pay taxes on the additional income, consider gifting that amount to a nonprofit organization, tax-free. Under current law, you can gift up to $100,000 per year.
Second, if you know you can still itemize your deductions, a charitable gift of cash will go farther on your tax return. Under the new tax law, you can deduct up to 60 percent of your adjusted gross income, an increase of ten percent from previous years. And if you itemize, you can contribute gifts of stock or mutual funds without paying taxes on the capital gains. You can only deduct up to 30 percent of your adjusted gross income with stocks and mutual funds, though.
There are other, more complicated and long-term solutions, like charitable gift annuities and charitable remainder trusts. To establish these, you will need an experienced financial advisor to work with you and your designated charity.
In any case, most financial experts advise to choose just a few causes that are truly important to you. Identify and thoroughly vet the nonprofit before donating. In most cases, you can make your charitable dollars go farther by giving more to fewer organizations, than if you were to give a little to many different ones. If you’re unsure how the organization is performing, check online resources like Guidestar and Charity Navigator.
For year-end donations, plan to schedule them for early December at the latest in case you run into processing delays. Whichever method you choose, consult with your CPA to make sure it’s the best strategy for your situation. Naden/Lean’s tax advisors can help you decide; contact us today.