Giving charitably can generate a wonderful feeling – that feeling that you personally made the world a better place by supporting a cause you’re passionate about. In addition, you also receive a tax benefit by way of a deduction on your tax return for the dollars you give.
The 2018 tax law threatened those deductions, almost causing panic for non-profit organizations throughout the United States. Charitable giving can be an important aspect of a tax and estate plan, so these changes to the tax code had advisors and clients rethinking the most optimal approach to maximize both the dollars gifted and taxes saved.
Prior to 2018, the standard deduction amount was $12,700 for a married couple and $6,350 for a single taxpayer. The new tax law increased these amount to $24,000 for married couples and $12,000 for singles. Why is this important? Charitable donations are an itemized deduction, meaning they are combined with other itemized deductions, such as home mortgage interest and medical expenses, to determine if taxpayers should take the standard deduction or itemize. People filing taxes take the greater of the standard or itemized deduction, so the higher standard deduction amount caused concern that fewer people would be incentivized to give to charity.
The new tax law disrupted the landscape of the philanthropic perspective because it got a lot harder to surpass the standard deduction limit. Taxpayers itemizing their deductions fell more than 40%, along with charitable giving, according to the Tax Policy Center, showing that taxpayers may not be giving solely because of the tax deduction but are less likely to give without it. With the standard deduction in 2019 going up again to $24,400, there are still a few options out there to give to the charity of your choice, while still collecting tax benefits.
- Qualified Charitable Distributions (QCDs), are a great technique to help reach your Charitable Gifting goals while keeping your retirement plan intact. Clients who are 59 ½ or older can donate to a 501(c)(3) charity of their choice directly from their IRA account without having to pay income tax on the amount distributed to charity. In the case of a retiree who saved a lot into a pre-tax 401(k), chances that they have a large Required Minimum Distribution (RMD) are high. This large amount of ordinary income may affect their Medicare premiums going forward. It’s an endless cycle. If this client is charitably inclined, however, then a QCD will help limit that income and support a great cause at the same time.
- Note: from experience, clients want to make sure they are tracking the donations made from their IRA accounts by getting receipts from their charities or foundations. Client’s year-end 1099-R report will show the full distribution amount as “income,” and it will be up to the tax preparer to make sure the donation(s) are recognized when taxes are being completed for the year.
- Highly appreciated securities, or securities that have appreciated in value a significant amount since their purchase, are another great vehicle to use for donations while also controlling taxes. It gives you the option to take advantage of the growth in the asset without having to pay capital gain taxes when it is donated. Most charities have brokerage accounts to which they will provide an account and routing number for you to send securities. If a client wishes to donate $10,000 worth of appreciated Apple or Amazon stock, the shares are sent to the charity’s brokerage account and are automatically liquidated. The client receives credit for the donation and does not pay any taxes on the gain from the asset.
- Note: If you own a security at a loss, it is best to sell it, recognize the loss and give the cash directly to a charity.
- Donor-Advised Funds, known as DAFs, are another method of charitable gifting that if used correctly, can save a lot in taxes. In a case where a client is selling or just sold a business, they may have a large payout or even several large payouts coming their way. These payouts would be viewed as ordinary income in the eyes of the IRS and will likely be taxed in the highest income tax bracket. Putting multiple years of gifting into one account at once – you take the tax deduction immediately and then gift out of the account over multiple years.
- Note: Donor-Advised Funds can also accept appreciated assets, allowing you to take advantage of the unrealized value of the asset for charitable giving while avoiding taxes on the unrealized gain. This concept is similar to # 2 on the list, highly appreciated securities.
- Cash has always been the traditional way of giving. Whether it was collection baskets at church, checks at fundraisers, or charity auctions, cash was usually the way people gifted as it was easy for both the donor and foundation. Of course, now taxpayers are finding it harder to reach the itemized deduction amounts with pure cash donations and therefore stick to the standard deduction amount, taking the deduction of the gift away. If you still want to give cash and receive a deduction, you need to give enough to go beyond the standard deduction amount. One way to do this could be to give cash gifts every other year so enough cash can be donated to pass the standard deduction threshold.
If you are charitably inclined, the best option for you may not be cut and dry. Everyone has different situations and goals when it comes to gifting to charity. Reach out to your Burney Advisor to discuss the different ways you can make the world a better place.
Here are the standard deduction amounts for 2019