Smarter Charitable Gifting Under the New Tax Law
The ability to receive a tax break from charitable giving has been significantly impinged upon by the new tax law that became effective this year. The good news, though, is that tactics exist which will allow you to preserve your charitable tax deductions in certain situations. I've provided a non-technical overview below and am happy to discuss it with you in greater detail at your convenience.
The new tax law has increased a taxpayer's standard deduction and, in turn, lowered a number of itemized deductions. Fewer than 10% of individuals are expected to have itemized deductions in 2018 that exceed the standard deduction. When itemized deductions are unavailable, the tax benefit of charitable giving is lost.
In order to preserve your charitable giving tax break, you can lump your charitable contributions into one year in an effort to clear the standard deduction. For example, instead of giving $6,000 a year for five years, you can donate $30,000 in one year.
Using a donor-advised charitable gift fund offers an excellent way to implement such "lumpy" giving. It allows you to make your charitable contribution in one year, but spread out your gifts to charities over the course of many years. In other words, a contribution to such a fund constitutes the charitable contribution for tax purposes. You can then direct the fund to make gifts to your favorite charities over time. It smooths out the lumps.
The most tax-efficient way to contribute to a donor-advised charitable gift fund is to use appreciated securities that have been held for at least one year. Let's say you paid $10,000 for the XYZ stock and three years later it's worth $15,000. You can contribute the XYZ stock directly to the charitable gift fund without having to sell it first. The contribution, for tax deduction purposes, is valued at $15,000 and you do not have to pay any taxes on the gain.
A different option presents itself for those individuals who are 70-1/2 years or older. Such a person can make a qualified charitable distribution from their IRA of up to $100,000 per year directly to charities (but not a charitable gift fund). While this does not constitute a charitable contribution eligible for a tax deduction, it prevents the IRA distribution from becoming a taxable event.
In pursuing these tactics, please consult with your tax professional to make sure you are implementing the approach correctly and that it achieves the desired result given your particular circumstances. Not surprisingly, this can get quite complex based upon your profession, taxable income, and filing status. Please let me know how I can be a resource as well.
Words of Wisdom
No one ever became poor by giving. -Anne Frank