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Giving Thanks and Giving Back: Donating to Charity in a Tax-Efficient Way

As we spend time this week giving thanks for what we have been given and looking ahead toward the “season of giving” that is fast approaching, it seems appropriate to delve into the subject of charitable giving.  Many academic studies have demonstrated the increased satisfaction and joy that comes with being generous, and, of course, the potential tax breaks from donations to charity don’t hurt either.

Impact of the New Tax Law.  With the new tax law in place, many taxpayers are interested in how to maximize tax deductions for their charitable giving.  As we discussed at the end of 2017, the new tax law is doubling the standard deduction this year (from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filing jointly), so many Americans who previously itemized deductions (including charitable giving) will take the standard deduction instead.  According to a Congressional Budget Office report from April, only 18 million households will itemize deductions this tax year, as compared with 49 million last year.  Depending on the level of your other itemized deductions (e.g. for mortgage interest, state and property taxes, medical expenses), you may now want to bunch charitable giving into certain tax years and take the standard deduction in the off years.  For example, if you normally give $15,000 per year to charity, plan instead to give $30,000 in 2018 (in order to benefit from itemizing deductions) and then do not give anything in 2019 and take the standard deduction instead.

Donor Advised Funds.  If you have appreciated securities (i.e. investments that have grown a lot since you purchased them) in a taxable account, you may want to facilitate tax-efficient charitable giving by establishing a donor-advised fund (DAF).  In this case, investors donate securities to a DAF and then “advise” that the DAF give grants to their favorite charities.  Investors can deduct on their taxes the fair market value of the securities at the time that they donated them to the DAF, avoid paying capital gains tax on the appreciation, and choose when to distribute funds from the DAF (giving from the DAF does not have to take place in the same tax year as the contributions).

Qualified Charitable Distributions.  If you are over age 70 ½ and must take required minimum distributions (RMDs) from your retirement accounts, another potential vehicle for charitable giving is qualified charitable distributions (QCDs).  Instead of paying ordinary income tax on your RMDs and then giving to charity, you can make donations to charities directly from your IRA.  If done correctly, the donation amount will be excluded from your adjusted gross income but will still count toward fulfilling your RMD.  Especially since fewer taxpayers will be itemizing deductions (including charitable giving) under the new tax law, QCDs might be a more tax-efficient way to give for those over age 70 ½.  You cannot itemize charitable giving done through QCDs, and the gifts must be transferred directly to a charity from one’s IRA, not through a Donor Advised Fund or private foundation (no double dipping on tax breaks!).  The limit on QCDs is $100k per year, but for most investors, that constraint is not a problem.

Being strategic in how you structure your charitable giving could generate significant tax savings each year.  With the new tax law in place, now is the perfect time to consider your giving strategy, so give us a call to see if any of these options would be beneficial for you.


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