David Harris
Jim’s February Tip: Smart Charitable Giving in 2018
A Giving Strategies post by Jim Friedman
The sweeping new tax law that took effect January 1, 2018 includes several changes that could impact the way people approach their charitable giving. It is helpful to review several aspects of the new law to determine how they might affect your giving plan this year. But even more important is to highlight several excellent ways to realize significant tax savings on charitable giving.
What has changed for 2018?
The biggest change as far as charitable giving is concerned is that the standard deduction has nearly doubled. For individuals it has gone from $6,350 to $12,000 and for married couples filing jointly it has gone from $12,700 to $24,000. Combined with new limits on itemized deductions for home mortgage interest and state and local taxes (including property taxes), many fewer people will be able to itemize their charitable gifts and will instead claim the standard deduction. Most people, therefore, won’t itemize charitable contribution deductions.
Assuming you may no longer be able to claim itemized deductions for your charitable gifts every year, how can you still achieve tax savings? Here are some helpful tips.
Make Charitable Gifts with Appreciated Stock Instead of Cash
One of the biggest tax advantages in charitable giving is the double benefit donors get when donating appreciated assets rather than cash. When you donate appreciated stock, you will receive credit from the recipient charity for the current fair market value of the stock at the time of the gift. And you will avoid paying taxes on the capital gain you otherwise would incur if you sold the stock first and then contributed the cash proceeds from the sale. This could be a sizeable tax savings, especially if you can no longer itemize deductions for the contribution. The lower the original cost of the stock you contribute relative to its current price, the more beneficial this strategy becomes.
The vast majority of people make their charitable contributions by check or credit card. If as a result of the increase in the standard deduction and the limit on the deductibility of state and local taxes, you lose the benefit of itemizing your charitable contribution deductions, then your charitable donations made with after-tax/non-deductible cash could cost you more than the actual amount of your donation (the donation plus the tax paid). All the more reason to use appreciated securities.
Establish A Donor-Advised Fund
But what if you make relatively small contributions to organizations and don’t want to have to go through the process of donating one or two shares of stock to each charity?
You can simplify your giving and use appreciated stock to benefit multiple charities—and make the process simple for the charities, too—by establishing a Donor-Advised Fund. The Donor-Advised Fund will administer your charitable contributions. You can contribute stock (or cash) at your convenience to your own named Donor-Advised Fund you establish at the Jewish Federation of Cincinnati or other sponsor. You will be credited for a making a charitable contribution in an amount equal to the cash you contribute and for the fair market value of stock you contribute (determined as of the date of the transfer of the stock to the Donor-Advised Fund). After you have made a qualified charitable contribution, you will make recommendations to the sponsor of the Donor-Advised Fund to make distributions from the fund to charities you choose. Check with the sponsor to determine the minimum amount you must maintain and the smallest distribution you can recommend. At the Federation, the minimum contribution necessary to establish a Donor-Advised Fund is $5,000; there is no minimum thereafter; you may recommend a distribution to a charity in an amount as little as $100.
Bundle Multiple-Year Contributions
Another benefit of setting up a Donor-Advised Fund in the wake of the increase in the standard deduction is to contribute a relatively large amount—appreciated stock will further leverage the tax benefit you generate—to your Donor-Advised Fund in one year, which will then cover several years of future giving. You can use this strategy to exceed the $24,000 standard deduction ceiling for married couples for the year in which you make your bundled stock contribution and itemize your deductions for that year. For the years during which you recommend distributions from the Donor-Advised Fund to charities, you claim the standard deduction. Every few years, you replenish and repeat. You maximize the tax benefits of both the itemized deduction and the standard deduction; if you use appreciated stock, you save even more by escaping tax on the appreciation and you get to choose the best time to contribute the stock; you simplify your charitable giving by only having to contribute stock to a single charity (the Donor-Advised Fund); and you have the peace of mind of knowing your charitable reserves are in place for the future.
Make Contributions from IRAs
Another smart charitable tax savings strategy for individuals 70½ and over (especially for those for whom the standard deduction will exceed allowable itemized deductions) is to make charitable gifts directly to charities from your IRA via “Qualified Charitable Distributions.” Each year’s “QCDs” can be in any amount up to a cumulative annual total of $100,000; you can arrange for transfers from your IRAs to as many charities as you desire. These charitable distributions are free from federal income taxes: the distributions are not included in your income. They may also reduce your state income tax (that’s the case in Ohio). In addition, qualified charitable distributions count toward the required minimum distribution that individuals who have reached age 70½ must withdraw each year from their IRAs. This produces another tax benefit, for less of that otherwise required distribution will be included in your income for tax purposes. Qualified charitable distributions produce a win-win for anyone over 70½ with an IRA and charitable intentions.
These are a few of the smart strategies that are available to those who want to make a difference with their charitable giving and also receive tax benefits from the government. While it is a well-known fact that saving on taxes is not the primary motivation for most people’s charitable gifts, it never hurts to get an extra benefit while doing good.
You can reach Jim Friedman, Director, Planned Giving and Endowments, at 513-985-1524 or jfriedman@jfedcin.org. You can reach the Federation’s Create Your Jewish Legacy team here and the Create Your Jewish Legacy website here.
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