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On Giving Tuesday, Shining a Light on Tax Strategies for Making Charitable Donations

| November 27, 2018
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After the throng of cleverly marketed excuses to shop over the Thanksgiving holiday, we have reached the refreshingly well-intentioned “Giving Tuesday”.  Started in 2012, Giving Tuesday was developed as a response to the increasingly rampant commercialization that has followed the national day of thanks and has experienced exponential growth year over year ever since.   In 2017, its sixth year of existence, an estimated $275 million was donated to charitable organizations on this single day.    

Optimism is somewhat tempered for the same level of success of Giving Tuesday this year as a result of the new tax law, the Tax Cuts and Jobs Act (TCJA), that was implemented for 2018.  While this new legislation offers a lot of potential tax benefits to individual and business taxpayers, one group that is expected to experience negative consequences from this change is charitable organizations.  The rationale behind this belief is that, with the standard deduction increasing to $12,000 for individuals and $24,000 for married couples (up from $6350 and $12,700 respectively), less people will benefit from itemizing their deductions- items like property taxes, mortgage interest, charitable contributions- since taxpayers generally take the greater of the two options. 

Without the incentive of tax breaks, unfortunately many people are expected to curb their giving starting this year.  According to a study by the American Enterprise Institute this past June, for instance, charities will collect around $16-$17 BILLION less in donations this year because of the new law, roughly a 4% decrease from 2017.  Another group called the Fundraising Effectiveness Project just released a report today showing that the number of donors is down 4.3% through the first three quarters of 2018 as compared to the same period last year (although they do show an overall slight increase in revenue from charitable giving). 

There is some interest among lawmakers in promoting policy changes that will provide more tax benefits to donors.  One strategy that is being proposed is a more universal charitable deduction as opposed to being limited to those that itemized deductions.

In the meantime, though, it might take some more creative planning to still reap some tax benefits for donating to charities.  Fortunately, there are strategies available that may be able to help certain taxpayers still accomplish this goal.  One strategy applies to those over the age of 70 ½ that have Individual Retirement Accounts (IRAs).  Rather than taking their own required minimum distribution (RMD), an individual meeting these qualifications may give up to $100,000 a year directly to charities from their account as a qualified charitable distribution (QCD).  By doing this, the donor can lower their taxable income as this transaction would be excluded.  If the IRA owner were to withdraw any money from their account under a normal distribution, such as to satisfy their RMD, this would likely be fully taxable. 

Let’s look at an example of how this might benefit a taxpayer.  Say you have a married individual with a household income of $100,000 that used to deduct $10,000 in charitable donations under the previous tax law, but after the TCJA came into existence, they would be better off taking the new higher standard deduction and would receive no benefit from their usual charitable deductions.  However, if instead they decided to simply donate that $10,000 directly from their IRA instead of writing checks as in the past, they could still get tax breaks:

 

Scenario A:  Without Charitable Contribution from IRA

Income

$100,000

Standard Deduction

-$26,600

Taxable Income

$73,400

Tax Liability

$8,427

 

Scenario B: With Charitable Contribution from IRA

Income

$100,000

Charitable Contribution from IRA

-$10,000

Standard Deduction

-$26,600

Taxable Income

$63,400

Tax Liability

$7,227

 

In this scenario, the federal tax savings for taking advantage of this strategy would be $1,200 (on top of the increased standard deduction) without increasing the level of charitable giving but rather simply changing the source of the funds.  And, depending on the taxpayer’s state of residence, even more tax savings are possible.

This strategy isn’t for everyone- again, to be eligible you have to be over 70 ½ and have funds in a Traditional IRA - but for those that qualify it could be a very beneficial tool for those that wish to give to charities.

Another strategy is to “bunch” charitable donation into a specific year rather than spread it out over multiple years as may have been done in the past.  This could be effective if, in the year that a larger amount of donations are made, the dollar amount pushes that taxpayer’s itemized deductions above the standard amount when otherwise a more level giving approach would result in little to no tax break.  This approach could be problematic if a taxpayer didn’t have the means or ability to withstand the larger outflow of funds to charitable organizations in that one year.   Otherwise, this tactic could be an effective alternative to those that normally wouldn’t benefit from their donations.

The last strategy I will mention is for those with appreciated stocks, mutual funds, or other securities to consider donating them to charities.  While a tax deduction might no longer be an incentive, depending on one’s overall tax situation, a gift of appreciated investments will at the very least remove any capital gains from the future sale of this investment from a taxpayer’s income.  And if it was held by the donor for at least one year, the taxpayer could potentially take a deduction for the fair market value of the investment. 

So, despite changes to the tax law that could curb some of the benefits for making donations, there are still creative ways to take advantage of certain tax breaks on gifts to qualifying charitable organizations.  In a perfect world, no one would need to be incentivized by tax deductions in order to be generous to worthy causes, but the reality is that these breaks do help encourage more people to give to charities.  And so, it is important to be aware of some of the strategies that are still available for those that otherwise might not be eligible to save on taxes through their generous giving.  If you have any questions, please feel free to contact my office.  Take care and may it be a blessed Giving Tuesday!

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