How to Give and Get Back with Tax-Advantaged Charitable Giving Following Tax Reform
Many more taxpayers are now taking the standard deduction as a result of the Tax Cuts and Jobs Act. The increase in standard deduction coupled with changes to certain itemized deductions reduces the ability of taxpayers to itemize deductions. As a result, a little more planning is needed to maximize the tax benefit from charitable donations.
For 2019, the standard deductions are:
Under the new rules, state and local tax deductions are limited to $10,000 and miscellaneous itemized deductions have been eliminated. Many taxpayers are not eligible to take medical deductions because of the high threshold. Therefore, the determination of whether or not to itemize often comes down to the total of mortgage interest and charity.
Tax Requirements for Charitable Giving
Charitable giving can be an effective measure to help offset future tax liabilities. Basic tax rules for benefitting from charitable contributions include:
1. Taxpayers must itemize their deductions to receive a federal benefit as there is no above-the-line deduction for taxpayers who use the standard deduction. See standard deduction chart above.
2. Contributions must be given to an IRS approved charity such as a 501(c)(3) organization.
3. Contributions are capped based on adjusted gross income (AGI) thresholds:
- Cash contributions to a public charity are limited to 60% of AGI
- Noncash contributions are limited to 50% of AGI
- Donations of appreciated property, such as stock, are limited to 30% of AGI
Any excess contributions unused in the current year due to these thresholds are carried forward for five years. Different limits apply for gifts to private foundations, as discussed later.
4. A taxpayer must be able to substantiate all charitable contributions through documentation or written acknowledgment letters from the charitable organizations.
5 Post-Tax Reform Charitable Giving Tips
Year-end planning around charitable giving can help determine how to get the biggest benefit based on your specific tax and cash flow situation. With tax reform changes and the increase in the standard deduction, it may make sense for some taxpayers to accelerate charitable contributions into one tax year rather than spreading contributions across multiple years. This could ensure they will itemize deductions to receive a benefit for the contributions made. Listed below are some of the more common types of charitable planning opportunities.
1. Donations of Appreciated Property or Stock
Donations of appreciated property or stock held for more than one year are deductible at the fair market value on the date of contribution. Any capital gain associated with the property is not recognized. Appreciated gifts of securities do not have to be appraised, however, donations of other property such as artwork or land may require an appraisal if the value is expected to be over $5,000.
2. Qualified Charitable Distributions (QCD)
An IRA owner who is at least age 70 ½ is eligible to make a QCD of up to $100,000 annually from their traditional IRA. This distribution is not taxed and counts toward the annual required minimum distribution (RMD). Since the distribution is for the benefit of a charity, the distribution is not added to income effectively reducing a taxpayer’s AGI for the year. There is no double dipping allowed so the QCD cannot be taken as a charitable deduction since the amount was never included in income. There are two key requirements for a QCD:
A. The distribution must be made via a direct transfer from the retirement account to the charity.
B. Only public charities can receive a QCD. A donor-advised fund or private foundation are not eligible recipients.
3. Donor-Advised Funds (DAF)
A DAF is a fund set up through a public charity, most often a special account at an investment company. The donor can advise, but cannot dictate how to distribute the funds in the account. A taxpayer contributes cash or property to the fund which allows them an immediate tax deduction even if the funds in the account have not yet been disbursed. Combine this strategy with #1 to get the biggest benefit.
4. Charitable State Tax Credits
Certain charitable organizations may have an additional benefit in the form of state tax credits. A state can allot a certain amount of tax credits to a charity to pass along to donors based on the level of donation given. These credits are generally valued at 50% of the contribution given and are a dollar for dollar reduction in tax liability on the state return. Each organization will have different threshold requirements as to what level of donation is eligible to receive these tax credits.An application will need to be completed for the credits and an issued certificate will be required when filing the state tax return to substantiate the credit taken. For any state tax credits received in which a benefit of greater than 15% is recognized, the charitable deduction on the federal and state return must be reduced by the tax credit received.
5. Private Foundations
High net worth individuals who want to control charitable activities can set up a private foundation, which is essentially the taxpayer’s own 501(c)(3) organization. Contributions to nonoperating private foundations are limited. Cash donations are generally capped at 30% AGI rather than 60%, and appreciated property is capped at 20% rather than 30%. Keep in mind private foundations have additional annual filing requirements with the IRS, strict administrative rules and initial set up costs.
Spending a little time coordinating your charitable giving can have a significant impact on your tax savings. In some cases, you can combine some of these giving strategies to get even more benefit.
To learn more about these giving strategies or more advanced planning, contact an Anders advisor.