Once again, year-end has snuck up upon many of us. And this year, your approach to year-end philanthropy may change from previous years as a result of the 2017 tax overhaul.
Of course, many of the same year-end considerations continue to apply. Don’t despair. By acting quickly, time remains for some effective year-end giving.
The New Law’s Impact
Among the most controversial provisions affecting individuals was the elimination of many itemized deductions, as well as a cap on total “SALT” (state and local tax expenses, which includes local real estate taxes as well as state income taxes) itemized deductions at $10,000.00. This is the cap for single, head of household, and married couples filing jointly. For married couples filing separately, the cap is set at $5,000 for each spouse’s tax return.
To help alleviate the pain from the deduction cap, the standard deduction was more than doubled (from $5,650 for single taxpayers to $12,000, and to $24,000 from $11,300 for married taxpayers). As a result of these two provisions, many additional taxpayers will claim the standard deduction rather than itemize compared to years past.
For example, if you are a married taxpayer who during a tax year pays $2,400 real estate taxes, $9,000 state income taxes (total SALT expenses of $11,400), makes $10,000 of charitable contributions, and has no other itemized deductions, under the old law, you would have itemized deductions. Why? Because applying previous tax rules your total itemized deductions are $21,400 or $10,100 in excess of the $11,300 standard deduction for married individuals filing jointly.
For 2018, your total deductible SALT taxes are capped at $10,000. So, although you paid total SALT of $11,400, the new law caps the deductible portion of your SALT expense at $10,000. Together with your $10,000 of charitable deductions, total itemized deductions you can claim under the new law are $20,000 (rather than $21,400 under the old law). Moreover, your available standard deduction (now $24,000) exceeds your available itemized deductions ($20,000) by $4,000. Given these facts, claiming the itemized deduction under current law would “cost” you $4,000, so you would take the standard deduction rather than itemizing.
Consider Bunching Gifts
But what if you know you plan to make $10,000 of charitable contributions in 2019, and have the assets available today to make the additional $10,000 of charitable contributions you had planned to make during 2019? From a tax perspective you should accelerate, or “bunch” your charitable giving into 2018. By moving the $10,000 of charitable gifts from 2019 to 2018, and increasing your charitable giving to $20,000 during 2018, you will now itemize your deductions in 2018. Your allowable itemized deductions for 2018 increase to $30,000 and now are $6,000 above the $24,000 standard deduction.
Moreover, assuming for 2019 your itemized deduction are now “only” SALT taxes of $11,400, by claiming the standard deduction for 2019, you can claim the $24,000 standard deduction in 2019 as a married taxpayer filing jointly.
So, by bunching your charitable deduction into 2018, you increase your combined deductions for the 2018 and 2019 tax years by $6,000.
A donor-advised fund (DAF) account is the ideal candidate for your bunched charitable contribution.
Rather than doubling gift amounts to particular charities during 2018 (since you are accelerating your charitable gifting from 2019 to 2018), make the accelerated gift to you DAF account. Then, during 2019, advise your DAF account sponsoring organization to make gifts to those charities you support.
Using this plan, you increase your 2018 allowable tax deductions by $6,000, and continue to make charitable gifts to the organizations you want to support on an annual basis.
Increase in Deductible Amount
One of the only itemized deductions receiving favorable treatment in the new tax bill is the charitable deduction. For those who give lots of cash to publicly supported charities, as of January 1, 2018, you can now deduct cash gifts of up to 60% of your adjusted gross income (AGI) on the tax return for the tax year the cash gift is made. Under previous law, the limit was 50%.
Should you be in such a generous position, and you weren’t aware of the more generous rule beginning with 2018 tax years applicable to cash gifts, it’s not too late to increase your cash gifts to publicly supported charities and take advantage of this favorable tax law change.
Unfortunately, given market action over the last few months, you may have fewer appreciated stock positions then you used to. However, though the market has not been as favorable as we would all prefer for the entirety of 2018, many people still have significant built-in, unrealized gains in marketable security positions held long-term (greater than 12 months). These are ideal assets for charitable giving.
A donation of these shares to a publicly supported charity (including a donor-advised fund) generates a deduction equal to the fair-market value on the date of the transfer of the shares donated, and you never recognize the gain associated with the gifted shares. You permanently and legally avoid reporting capital gains on the contributed shares, because donation of the shares is not considered a sale or exchange of the stock.
If you like the investment, you are always free to re-establish the position, but the new position will now have no built-in gain (although you will have to wait 12 months after re-establishing the position to receive long-term capital gain treatment when you ultimately sell the shares).
Qualified charitable distributions from an IRA
If you are over 70 ½, have still not met your IRA required minimum distribution (RMD) requirement for 2018, and don’t need the cash, consider making a direct distribution from you IRA to a publicly supported charity(ies) of your choice before year-end. Such distributions count toward your RMD, but are never included in your gross, adjusted gross, or taxable income.
Every taxpayer may make qualified charitable distributions of up to $100,000 in any tax year from their IRA. Keep in mind that your IRA fiduciary must make the check payable only to the qualified charity, you must be over 70 ½ when the distribution is made, the charity must issue you an acknowledgement letter so that you can substantiate the distribution from the IRA for tax purposes, and the distribution must be to a “qualified charity.” In general, any publicly supported charity is charity qualified to receive a direct distribution from an IRA. There are two exceptions.
- A publicly supported charity organized as a supporting organization is not a qualified charity for the purpose of the IRA charitable exclusion rule.
- Neither is a distribution to a publicly supported charity for the purpose of funding a donor-advised fund account.
Note that you may make a distribution to a charity that maintains a donor-advised fund program. However, the purpose of the IRA distribution cannot be to fund your or anyone else’s donor-advised fund account.
So, we at DonorsTrust would be more than happy to accept a direct distribution from your IRA to DonorsTrust for the purpose of supporting the Whitney Ball Memorial Fund, a board-directed fund that is not a donor-advised fund. Rather, it is a fund used to further the work of DonorsTrust and the liberty movement in the memory of Whitney, our first CEO & President, and one of our founding board members.
Finally, note also that although a direct distribution from your IRA to a supporting organization or to fund a donor-advised fund account does not qualify for the special rule excluding IRA distributions from your income, these are not prohibited distributions. You are always free to make such IRA distributions. It’s just that these distributions are (1) includable in taxable income in the year the distribution is made, and (2) you then claim a charitable deduction for the distribution made directly to the supporting organization or the donor-advised fund account, as the case may be.
Get Started with a DAF
It seems like everything is a rush this time of year. While there are definitely timing considerations for your philanthropy when it comes to the tax implications, you can take the rush out of the decision-making process for grant making by using a donor-advised fund.
There is plenty of time to both open and fund a DonorsTrust DAF account during 2018, especially if you are funding the DAF account with cash. If you plan to transfer stock or other assets, then time is short. Contact us as soon as possible so we can assist you with opening and funding your DAF account.