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3 tax-smart ways to make charitable gifts in 2018 and beyond

3 tax-smart ways to make charitable gifts in 2018 and beyond

Before TCJA (the new tax law), charitable deductions were a pretty easy piece of the financial puzzle. You chose your charity, donated a certain amount, and deducted that amount from your taxable income. Sure, giving pre-tax dollars was better, but even if you simply wrote a check to your charity of choice, you got a tax deduction. Oh, how times have changed! And those changes have me worried not only about the much-needed cash flow to charities, but also about the impact on our clients—especially those who give $1,000 or more over the course of the year. The good news: careful planning now can save you money on taxes in the coming years, and it can also help ensure your gifts are making a real financial difference to the organizations that rely on your help year after year.

The change that is likely to impact charities most is the increase in the standard deduction. The deduction for married couples filing jointly has nearly doubled, from $13,000 to $24,000. For single taxpayers and those who are married and file separately, the deduction will rise from $6,500 to $12,000. This increase presents a challenge when it comes to charitable giving. Because most taxpayers won’t exceed the standard deduction, they will no longer need to itemize. And without a direct tax benefit, charitable gifts may be much less attractive—at least from a tax perspective.

Luckily, there are strategies to help charitable donors maintain a tax advantage while continuing to support the good work of the organizations they support. Here are three options to consider today:

  • “Bunch” your gifts to deduct years of gifts in a single calendar year.
    If you have the cash on hand, you can bunch multiple years of gifts into one tax year. If you’re single, your standard deduction is now $12,000. Let’s assume your property taxes are $6,000 and your state income tax is $5,000, equaling $11,000 in deductions. If you then give $1,000 to charity, even though you max out your standard deduction, you receive no tax benefit. However, if you plan to give $1,000 each year for the next five years, opting to give a lump sum of $5,000 in 2018 will result in a taxable deduction of $4,000 beyond the standard deduction. Your charity of choice will benefit from the lump-sum donation, and so will your wallet come tax time next year. The only limit is that you can only deduct cash donations of up to 60% of your Adjusted Gross Income (AGI) in a single year. (And you can still use appreciated securities to fundthe donation.)

     
  • Create your own “charitable foundation” using a Donor Advised Fund.
    If your contributions to a particular charity are large, it may make sense to set up a DAF, or Donor Advised Fund (it’s easy, and yes, we can help!). A DAF allows you to make a lump-sum donation to take advantage of the up-front charitable tax deduction in the current year. But unlike bunching contributions in a single year, the DAF gives you the flexibility to spread your gift out over time. You can even name your children as “successor grantors” for the fund to effectively pass down the assets of the fund tax-free and help support their own gifting in the future. (And you can supercharge the contribution to your DAF by gifting appreciated securities.)

     
  • Give via a Qualified Charitable Distribution.
    If you’re over 70½, a Qualified Charitable Distribution (QCD) allows you to give to your charity of choice with pre-tax money, while also reducing your taxable income. It is a method of giving that saves you taxes twice. For example, let’s say you have an IRA with Charles Schwab and your RMD (Required Minimum Distribution) from your IRA is $20,000. Using a QCD to make your annual $1,000 pledge, Charles Schwab writes two checks: one for $1,000 that goes directly to your charity for it to use tax-free, and another for $19,000 that goes directly to you as taxable income. The QCD amount (up to $100,000 annually to any qualified charity) is excluded from your adjusted gross income, and you benefit from a full $12,000 standard deduction. It’s a great way to optimize tax savings compared to using a typical after-tax IRA distribution. You can use a QCD to give up to $100,000 annually—even if that amount exceeds your RMD. Note: you can’t request a QCD until you hit that magic age of 70½. It’s one of the perks that comes with age!

One last note: If charitable giving is part of your legacy planning, donating assets from your IRA is often a smart option—the charity can use the gift tax-free, and your heirs won’t pay a dime in taxes on your gift.

In the face of the new tax laws, careful, multi-year planning is more important than ever. That’s especially true when giving to charity. But by making ‘doing good’ an intentional piece of your overall financial plan, you can use tax law to your advantage to make every dollar count and, most importantly, continue to support the charitable organizations that are making a real and positive difference in our world today.

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Giving when (and where) it’s needed most

Giving when (and where) it’s needed most

For many, Thanksgiving begins the giving season. The holiday is a time to be thankful and to give to charity—whether that means volunteering to feed the homeless on Thanksgiving Day, or offering time, money, and physical goods to a worthy cause. In recent weeks, it’s been thrilling to see the outpouring of charity to non-profit organizations. Charities that support the environment, immigration, and equal rights for women and LGBT people have seen a swell of support—adding up to an unprecedented outpouring of donations. The Sierra Club saw a 400% increase in its average monthly donations in November, and the American Civil Liberties Union (ACLU) broke its own donation records this month as well, collecting $2.4 million from nearly 39,000 contributors.

If you’re feeling equally enthusiastic about giving this Thanksgiving, it’s a great time to put your money where your heart is. Major cuts in federal support for many of these non-profits may be in the works, and it’s likely that tax incentives for giving will decrease in the coming years. The good news: there are a number of ways you can maximize your giving immediately. Here are just a few ideas:

Donate from your IRA. Last year, Qualified Charitable Distributions (QCDs) from individual IRAs were finally made permanent. A great tool if you are overfunded in your IRA, a QCD allows you to donate up to $100,000 of your tax-deferred IRA savings annually—and the portion you donate qualifies toward your annual Required Minimum Distribution (RMD). Even better, it isn’t added to your Adjusted Gross Income for tax purposes, which strengthens your gift by enabling you to give even more.

To qualify, you must be 70 ½ or older on the date the donation is made, all funds must be transferred directly from your IRA to the charity (most charities are prepared and more than happy to assist with the paperwork!), and the transfer must be completed before you receive any other distribution toward your RMD.

Create a Donor-Advised Fund. If you have significant assets to donate today, this type of philanthropic fund allows you to receive a current-year tax deduction (under the current rates) while providing support for the charity of your choice for years down the road. Because any gifts to a Donor-Advised Fund are irrevocable, you receive the tax credit for the current year only. You also have the option of donating non-cash assets such as stocks or other complex holdings directly into the fund. This not only helps you avoid capital gains tax, but that savings enables you to give even more to the causes you’re helping to support. Your contribution is treated as a gift to a 501(c)(3) public charity, and you are allowed to deduct up to 50% of your adjusted gross income for cash gifts, and 30% for appreciated securities.

Once assets are gifted to the fund, the investments can be sold or reinvested for continued growth without generating any capital gain tax to you as the donor. And though you’ll receive the tax deduction right away (that means 2016 if you can pull it all together by year end), you can donate the account proceeds at any time—in the year the gift was made (and credited to your taxes) or in any subsequent year.

Donate stocks or other investments “in kind.” The Dow just broke yet another record this week, topping 19,000 for the first time in history. That’s great news—in part because there are substantial benefits when you donate appreciated securities directly to charity. When you sell your securities directly, you’re likely to get hit with some hefty capital gains tax, which can significantly reduce the funds you have remaining to gift. Luckily, there’s a way around this conundrum.

By donating your appreciated assets “in kind” to a charity, they receive the actual stock (or other assets), rather than the proceeds from the sale of the asset. As a result, you save the Federal capital gains tax and any state taxes. Benefits to you include a lower adjusted gross income (AGI), and the market value of the donation as an itemized charitable contribution. The charity benefits as well; because the gain on the security is tax-free to a qualified 501(c)(3) charity, the organization is able to sell the security tax-free. Leaving taxes out of the equation means more dollars to your beneficiary charity.

No matter how you give, deciding where to give is an important choice. There are numerous sites to help you research potential charities to be sure that they’re legitimate and that your dollars will actually be used to help your intended recipients. Take a look at Charity Navigator and Charity Watch to help you determine the best options. And when you do make a decision, I recommend making significant contributions to a select few rather than smaller contributions to many. Not only will your gift have a greater impact, but you’ll likely feel a stronger connection to the charities that matter most to you—and vice versa.

Of course, the most important thing is simply giving what you can, when you can, to the charities that matter most to you. Remember that every dollar makes a difference. In times like these, when certain causes are in greater need than ever, I hope you’ll consider giving what you can.

Need help setting up a donor-advised fund, QCD, or other vehicle for charitable donations? Please contact us right away to be sure we can meet the December 31 deadline. As always, I’m here to help.

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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >