The recently passed Tax Cuts and Jobs Act is the most extensive and far-reaching change to the tax code in more than thirty years. In addition to altering the existing tax brackets, the standard deduction has also been nearly doubled, which means that going forward taxpayers will need to provide more itemizable deductions in order to exceed the standard deduction. If you plan to give to charity before year-end, here are six planning moves to consider.
1. Donate Highly Appreciated Stocks or Mutual Funds.
The stock market has been on a terrific run, and you may have highly appreciated stocks or mutual funds that you are holding on to because you do not want to pay capital gains taxes. By donating appreciated investments, you avoid paying the capital gains tax and can receive a deduction for the fair market value of the investments.
If you are considering gifting mutual funds, do so before they declare their year-end dividends and capital gains and you will save on taxes by avoiding that income as well. While a deduction for appreciated securities is now limited to 30% of your Adjusted Gross Income (AGI), you can still carry the unused portion to future tax years. When making a gift of appreciated securities, you should notify the charity that you are doing so in order for them to know who to send the record of receipt to (so that you can have that on hand when filing your taxes).
2. Combine Giving from Multiple Years Into One Year
Because the standard deduction has now been nearly doubled, consider lumping several years’ worth of contributions into one year to occasionally exceed the standard deduction. The strategy here would be to “lump” our charitable giving in one calendar year so that our itemized deductions exceed the standard deduction, and then simply claim the standard deduction in the following year(s). The following graphic attempts to illustrate what this might look like for an individual taxpayer:
3. Use a Community Foundation or a Donor Advised Fund
If you want to create a legacy, are unsure of where to contribute right now, or want to consider “lump” giving, use a Community Foundation or Donor Advised Fund (DAF) to max out your contributions. A DAF is a unique type of account that is maintained an operated by a qualifying charitable organization, including most Community Foundations. Once you create a DAF and contribute to it, your contribution qualifies for a charitable deduction on your tax return.
However, even though you can deduct the entire amount in the year that you make the contribution, you can make distributions from the DAF in future years to the charities of your choice. In other words, you aren’t required to distribute all the DAF’s funds in the year that you make your contribution to it. So, you could “lump” several years’ worth of charitable giving into your DAF and then make annual distributions to your favorite charities over the course of the next several years until your next “lump” contribution.
Additionally, the money in your DAF can be invested, creating the potential for even greater giving in the future via the power of compounding interest.
4. Create a Charitable Lead or Remainder Trust
If you are considering an even larger donation, or are interested in asset-protection, you may want to consider creating either a charitable lead or remainder trust. With a charitable remainder trust, you get a deduction for your gift now; generate an income stream for yourself for a determined period of time; and at the expiration of that term, the remainder of the donated assets is distributed to your favorite charity or charities. A charitable lead trust is essentially the inverse of the remainder trust: you get a deduction for your gift now; generate an income stream for one or more charities of your choice for a determined period of time; and at the expiration of that term, you or your chosen beneficiaries receive the remaining principle. The deduction you receive is based on an interest rate, and the low current rates makes the contribution value high.
5. Donate Unused Belongings
Donate your extra property, clothes, and household items to charity. Make time to clean out your closets, spare bedroom and garage, and donate those items to one of the many charitable organizations in our area. CHKD, Salvation Army, Purple Heart, ForKids, Hope House are just a few organizations that will take old clothes, appliances, household items and furniture. Some of them will even come to you to pick up items. Make sure to ask the charity for a receipt and keep a thorough list of what you donated. You can use garage sale or thrift store prices to assign fair market values to the donated items, or you can use online programs (such as itsdeductible.com) to figure out values.
6. Qualified Charitable Distributions (QCD’s)
If you are over age 70 ½, regardless of whether you itemize or not, make a qualified charitable distribution (QCD). We discussed this charitable donation method in detail in an earlier post, which can be found here. Essentially a QCD allows you to donate all or a portion of your IRA Required Minimum Distribution to a qualifying charity. The donated amount is not included in your taxable income and also helps to lower your income for certain “floors” like social security benefit taxation and Medicare Part B and Part D premiums. QCDs are very tax-efficient ways to make charitable donations.
Disclaimer: This material has been prepared for general information purposes only, and is not intended to provide, and should not be relied on for, personal tax, legal, investment, financial planning or accounting advice. You should consult your own tax, legal, investment, financial planning and accounting advisors before engaging in any transaction.