While there may be a lot of wisdom in the proverb “May your charity increase as much as your wealth,” there can also be wealth in properly planning your charitable giving. This wealth is derived from the economic benefit that can result from tax savings achieved by implementing certain charitable giving strategies.
Bunching of deductions is one such charitable contribution strategy. Because the Tax Cuts & Jobs Act limits many allowable itemized deductions beginning in 2018 and increases the standard deduction, many taxpayers will find that the standard deduction is more beneficial than itemizing, thus losing the tax benefit of making the gift. By planning the timing of the charitable contributions, effectively bunching them into certain years, taxpayers can maximize their usage of the increased standard deduction in yeas when there is no charitable giving and utilize the itemized deduction in the year when the charitable giving takes place.
A related concept is the establishment of a donor advised fund for charitable giving. The donor gets a charitable tax deduction when the fund is established. Even though the charitable organization may not receive the funds for some time, the establishment of the fund is essentially earmarking the assets for charity. It can be funded with cash, securities, or other assets. The funds are invested and there is no tax on the income generated by the investments or on any growth before an asset is sold. The donor then uses the funds to support charitable organizations. Those gifts, however, are not tax deductible since the deduction was taken when the assets were placed in the fund.
Another useful planning idea, especially for taxpayers who will no longer be itemizing charitable and other deductions, is the use of Qualified Charitable Distributions (QCD). QCD are required minimum distributions (RMD) from IRAs (other than ongoing SIMPLE or SEP IRAs) that are used to make donations to qualified charities. There is a $100,000 annual limit on the use of the QCD. The funds are transferred directly from the IRA to the charity and are neither included in the donor’s income nor allowed as a charitable deduction. They DO count towards the donor’s required minimum distribution for the year. The donation must be one that would otherwise have qualified as tax deductible and the entire RMD transferred to charity must have been includible as taxable income for the donor.
Gifting appreciated property, especially stock, is a popular strategy for making donations. The amount of the deduction allowed for the stock is the fair market value on the date of the donation if the stock was held for more than a year. The taxpayer avoids the tax that would have been due on the appreciation in value had the stock been sold and the proceeds donated.
Many taxpayers were hoping to recharacterize all or part of their real estate tax obligations as charitable contributions. The IRS effectively put the kibosh on that concept earlier this year.
There are many regulations related to the deductibility of charitable contributions. If the tax ramifications of your charitable giving is a topic you would like to discuss, please feel free to call.
Article contributed by Terri Marakos, CPA