As individual taxpayers begin to plan their charitable gifts in 2019, below are some planning points for your consideration that could help you maximize the tax deductibility of your gifts.
Taxpayers should consider “bunching” multiple years of desired annual charitable gifts into one year. Recall that the Tax Cuts and Jobs Act (TCJA) increased the basic standard deduction to $24,000 for married couples ($12,000 for single filers) and capped the deduction for state and local taxes at $10,000. This means that many taxpayers who have previously itemized deductions may now take the standard deduction. Essentially, joint taxpayers will only be itemizing if their $10,000 of state and local taxes, mortgage interest, and charitable deductions collectively exceed $24,000. For example, a married couple that typically makes $12,000 of annual charitable gifts and will hit the $10,000 cap for state and local taxes could bunch together two years for gifts for a total of $24,000 in year 1. Their total deductions in year 1 would be $34,000 and in year 2 they would simply take the $24,000 standard deduction. The bunching strategy would allow the couple to total $58,000 of deductions over the two year period compared to $48,000 if they simply continued with $12,000 of annual gifts.
Alternatively a donor advised fund could be utilized by “front-loading” charitable gifts now. A donor advised fund is an investment account held for charitable purposes. Donors receive a charitable tax deduction when the account is funded and then are able to make gifts from the account over time. Continuing the example from above, the married couple could make their $24,000 of gifts in year 1 to a donor advised fund rather than to charitable organizations directly. They would benefit from the deduction in year 1 but could wait until future years to decide which charities will ultimately benefit from their fund.
Taxpayers who withdraw funds from their IRA account simply because they are subject to the required minimum distribution (RMD) rules could create significant tax savings by making a qualified charitable distribution (QCD) from their IRA. All or a portion of a taxpayer’s RMD (up to $100,000) can be sent directly to a charitable organization thereby excluding that amount from the taxpayer’s gross income but counting it against the RMD requirement. A QCD could be a particularly useful strategy for taxpayers who will not receive a tax deduction for their charitable gifts because of the current increased standard deduction. This strategy could fulfil a taxpayers desire to be charitable and receive a tax benefit for their donations. The lower adjusted gross income resulting from a QCD may also lessen the effects of phase-outs and limitations on other tax deductions.
Rather than giving a charity a cash gift, taxpayers should consider making an in-kind gift of appreciated securities. Suppose you own a mutual fund with a basis of $20,000 and a current value $100,000. If you sold the fund and gifted the cash to a charity, after paying taxes, the net gift would be approximately $77,000. If the mutual fund was instead gifted directly to the charity, which the charity can sell tax-free as a tax exempt entity, the value of your gift would be $100,000. This strategy is especially useful for securities with a very low, or perhaps unknown, basis.
As a reminder, the TCJA states that no charitable deduction is allowed for any payment to an institution of higher learning in exchange for which the taxpayer receives the right to purchase tickets or seating at an athletic event.
If you would like to discuss tax planning specific to you and your family in greater detail, please contact your Wealth Advisor.
