Tax Optimized Ways to Continue Charitable Giving Under the New Tax Cuts and Jobs Act of 2017
The new tax law is already changing the way individuals are contributing to their favorite organizations. At Nisivoccia LLP, we are advising our clients on several new strategies that will enable them to continue charitable giving while minimizing their tax liability.
SALT and the Standard Deduction
The two key changes to the law that will impact charitable giving include the new standard deduction amounts and the limitation to the SALT (State and Local Tax deductions).
The standard deduction amounts of $12,000 filing single and $24,000 for married joint filers will drastically reduce the number of taxpayers who will be eligible to itemize. The number of allowable deductions will now be limited to charitable, medical, mortgage interest and SALT. With SALT capped at $10,000, many individuals will not exceed the new standard deduction limits. To continue to itemize, you would need to exceed the standard deduction amounts.
Below are tax-optimized alternatives to consider when making your donations.
To continue to itemize and take full advantage of the new law, individuals are opting to bunch their contributions. Bunching is defined as grouping multiple years of donations into one year for tax benefit purposes. The funds are then deposited into a donor advised fund or program for future distribution.
For example, if you are married filing jointly and your yearly charitable contribution is $10,000, and you have another $12,000 in other deductions. Under the new law, you would automatically claim the standard deduction of $24,000.
However, if you can bunch multiple years of charitable donations, 4 years for $40,000, then add the $12,000 of other deductions, you can itemize in the first year the amount of $52,000, which exceeds the standard deduction of $24,000. With a lower adjusted gross income, taxpayers can be eligible for other related tax benefits.
In subsequent years, you will take the standard deduction of $24,000, which is more than your itemized deductions of $12,000. Doubling your eligible deduction.
Tax Required IRA Payouts
Taxpayers can transfer up to $100,000 annually from their IRA accounts directly to a qualified charity without having to recognize the income. This transfer is called a Qualified Charitable Distribution (QCD) and counts towards satisfying the required minimum distribution (RMD) for the year.
Donors who take advantage of this opportunity will benefit from a lowered adjusted gross income which can result in an increase in other itemized deductions as well as reduce their taxable social security benefits and/or future Medicare premium. Please note you cannot claim the QCD amount as a charitable donation. QCDs are also limited to the amount that would otherwise be taxed as ordinary income, this excludes non-deductive contributions.
While most types of IRAs are eligible, you must be 70 ½ years or older to take advantage of this transaction.
Donation of Appreciated Assets
Another tax optimized option is to donate appreciated assets directly to a charitable organization. By donating directly to a charity, the donor avoids paying capital gains tax and can deduct the full value of the charitable deduction. The charity can then sell the stock incurring no tax burden. Many vendors provide funds to help make this option seamless.
Donor Advised Fund vs. Donor Advised Program
Donor advised funds are equivalent to a mutual fund account. Any donations made to one of these funds will get transferred into the holdings of the specific vendor’s plan. A donor advised program provides more investment options to the contributor. For example, they will also include equity and cash fund options. The American Endowment Fund is an example of a Donor Advised Program. Many people are happy with a donor advised fund while others like the option to invest their donation in more diversified equities and funds.
Schedule a Workshop with your Board
Please contact one of our not-for-profit partners, Thomas Dartnell, Anthony Rispoli or Chris Perrotta, if you would like us to meet with you, your board or major donors to further explain these tax strategies.