Tax Alert: Contribution Planning in Light of Tax Reform

Charitable Giving Strategies

A significant change brought about by the Tax Cuts & Jobs Act (TCJA) which will affect a large percentage of taxpayers is the elimination of various itemized deductions.  One remaining deduction, with which many Americans are familiar, is the deduction for charitable giving.  While the deductibility of an individual’s charitable contributions will vary due to many new factors including an increased standard deduction, many charitably-inclined Americans will continue to give but may need to explore new giving strategies so as to maximize their tax benefit.  Below please find a brief outline of charitable giving strategies which may assist you in continuing to achieve your charitable giving goals in a tax-efficient manner:

  1. Skip-year giving: For a large percentage of taxpayers who took advantage of itemized deductions under the previous tax law, the increase in the standard deduction will result in a reversion to the standard deduction.  In order to obtain the greatest tax benefit from charitable giving, individuals may consider skip-year giving, which entails giving a greater amount in a particular year (doubling or tripling charitable gifts every other year or so) instead of giving smaller amounts each year.  This method may result in alternating between the standard deduction and itemized deductions from year to year, but will allow the taxpayer to maximize his or her itemized deductions in the years that the larger charitable donations are made.
  2. Donation of appreciated securities: Due to recent economic activity, many individuals may find themselves with portfolios full of appreciated stock which, once sold, has the potential to result in large capital gains, and furthermore, a large tax liability, for the taxpayer.  A method of accomplishing both the taxpayer’s charitable giving goals as well as reducing the amount of income tax paid by the taxpayer is through donations of appreciated securities.  The new tax law maintains that up to 30% of a taxpayer’s Adjusted Gross Income (AGI) may be contributed in the form of securities.  If an individual has budgeted to give to an organization, he or she should consider utilizing this method prior to the contribution of cash so as to maximize tax-efficiency of charitable contributions.  The use of appreciated securities in lieu of cash creates financial planning, investment, and tax-saving opportunities.  In an effort to not derail any long-term financial plans, the cash originally budgeted for charitable purposes may be directed back into the investment account to rebalance the portfolio and reset the taxpayer’s basis in newly-acquired securities.
  3. Donor-Advised Funds: Donor-advised funds are charitable giving vehicles which may be used to achieve either of the strategies listed above. Irrevocable donations of cash, appreciated assets or investments may be made by an individual to a donor-advised fund to create a reserve of funds from which he or she may direct grant distribution to charitable organizations.  A tax deduction is available to the taxpayer upon the donation of funds or assets to the DAF, however, if the taxpayer chooses not to issue the grant from the DAF right away, assets may be invested and grown tax-free within the donor-advised fund, providing yet another method to maintain and achieve an individual’s charitable giving goals in a tax-efficient manner.
  4. Utilizing your IRA: A little-known tax planning tool which, upon the passing of the TCJA, will undoubtedly increase in popularity is the utilization of IRA funds for tax-efficient charitable giving. This method allows any individual age 70 1/2 or older who is required to take a required minimum distribution (RMD) from his or her IRA to direct up to $100,000 of the RMD funds to be distributed directly to the charitable organization of his or her choice.  These direct charitable transfers, otherwise known as Qualified Charitable Distributions (QCDs), are popular because they reduce the amount of income which would otherwise contribute to the taxpayer’s Adjusted Gross Income (AGI) while also counting towards satisfying the taxpayer’s RMD.  While the amount distributed to the charitable organization via the QCD is not considered an itemized deduction, it is considered a significant tax benefit as it reduces the amount of AGI which would otherwise be subject to income tax.  Those who utilize this method may opt not to itemize, but make charitable donations (which would have been made regardless) via the QCD.

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