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Tax Planning for Charitable Giving under the New Tax Law

By: Terry Roe
Published in Articles on March 05, 2019

I have been helping people in our local community with their finances for over 30 years, and the people of the Snake River Valley have always impressed me with their generosity. Community members’ generous donations of money and time to various religious and nonprofit organizations are remarkable.

As you probably know by now, the new tax law nearly doubles the standard deduction for 2018 – to $12,000 for singles and $24,000 for married filing jointly younger than 65 years old – while capping or eliminating other deductions. That means that for many taxpayers, it will no longer make sense to itemize their deductions. The Tax Policy Center estimates that the number of households claiming an itemized deduction for charitable giving will fall from 37 million to about 16 million in 2018, and The Council on Foundations estimates that the new law will decrease charitable giving in the United States by $16 billion, to $24 billion annually.

While tax deductions aren’t always the motivation behind generosity, sometimes the tax deduction enables a larger, more generous gift. Even though the tax law has changed, there are still ways to give that are more tax effect. I would like to share with you three tax-planning opportunities for charitable giving under the new tax law.

Bunching

Maybe you have heard your friends talk about “bunching” their deductions. This strategy simply attempts to take advantage of itemizing deductions one year and using the standard deduction the next year. You bunch two years’ worth of giving and deductions into one year. This strategy works well for taxpayers who are close to the standard deduction, as bunching can put their itemized deduction amount significantly above the standard deduction amount every other year. For example, if a married couple pays $10,000 in state and local taxes and makes $12,000 in charitable donations each year and has no other itemized deductions, it would make more sense for them to claim the standard deduction of $24,000 on their income tax return than to itemize. However, if they bunched their deductions, they would claim $10,000 in state and local taxes and $24,000 in charitable donations, for a total of $34,000 in itemized deductions in one year. The next year, their itemized deductions would be only $10,000, and it would then be beneficial to take the standard deduction of $24,000. Bunching in this example would result in total deductions claimed over two years of $58,000, which is $10,000 higher than just claiming the standard deduction each year.

For those taxpayers who are charitably inclined and want to bunch their deductions but don’t yet know which charities they want to support, consider using a donor-advised fund. It’s important to know that donor-advised funds have rules and restrictions that you don’t face when simply writing a check to a charity. You will need a minimum of $5,000 to set up a donor advised fund at Fidelity Charitable, Schwab Charitable or TIAA Charitable. These donor-advised fund sponsors also handle the recordkeeping, but they charge a fee, often somewhere in the range of the larger of $100 or 0.60% annually on up to $500,000 in assets.

Qualified Charitable Distributions

If you are age 70 ½ and are taking required minimum distributions (RMD) from your IRA, then you have a great tax-advantaged opportunity to make charitable gifts. The law allows traditional IRA owners who have begun their RMD to directly transfer up to $100,000 from a traditional IRA to a qualified charity. The qualified charitable distribution (QCD) can be used to satisfy your RMD for the year. The amount of the RMD used for QCD is not included in income, allowing you to kill two birds with one stone. Even better, the income doesn’t show up in your adjusted gross income on your income tax return, which could help you reduce the taxes on your Social Security Benefit or avoid Medicare premium surcharges. The QCD is a home run for those who are charitably inclined and who qualify. In fact, it is a tax-saving no-brainer.

Donate Appreciated Assets

Another way to generate a tax break is to donate appreciated assets, such as shares of a stock, mutual fund, or exchange-traded fund that have grown in value over time. The asset must be held in a taxable account and you must have owned it for at least one year. With this strategy, you can take advantage of two tax breaks. First, by making the donation, you avoid any long-term capital gains tax on the asset, and second, you can also claim a charitable deduction, assuming you can itemize in the year you donate (see the previous discussion about bunching). It is important to note that there is an annual deduction limit on donating appreciated assets – 30% of your adjusted gross income – whereas the annual limit on donating cash is 60% of your adjusted gross income. For larger donations, you can carryover the amount unused because of the limitation for the next five years. If you own an asset that has appreciated and you want to continue to own the asset, this strategy allows you to step up the tax basis in the asset tax-free. For example, assume you paid $2,000 for ABC mutual fund and it is now worth $25,000. You would like to make a charitable donation to your church of $25,000 but you still want to own ABC mutual fund. You take the cash you have set aside for your charitable donation and purchase additional ABC mutual fund shares, then specifically identify that you are donating the first shares purchased. You now own ABC mutual fund shares worth $25,000, but your tax basis has gone up to $25,000. You have just stepped up your basis in your investment tax-free.

Disclaimer

It is harder for most people to deduct charitable gifts under the new tax law, but there are still ways to get a tax break while doing good. Remember, this article is intended to provide information that is general in nature. Your circumstances are unique and personal to you; therefore, I advise you to seek the advice of your tax advisor before beginning a charitable giving strategy.