The Tax Cuts and Jobs Act of 2017 eliminated or capped a lot of itemized deductions for most taxpayers. While deductions for charitable gifts were preserved, raising the standard deduction meant that many taxpayers lost the benefit of all but the largest donations.
Here are some simple and inexpensive strategies that you can use to squeeze out the maximum tax benefit, given the current tax rules and market conditions.
Qualified Charitable Deduction (QCD). For IRA owners who are over 70.5 and taking required minimum distributions (RMDs), you can simply have donations sent directly from the IRA to the charity. These charitable distributions count towards your RMD and because you never receive the distribution, it’s not considered income to you. Effectively, the deduction comes from lowering your income before it goes onto your tax return, instead of showing up later as an itemized deduction that you may not even get to take under current rules.
Donor Advised Fund (DAF). This requires a bit more work to set up, but once you do it can be a very simple and effective way to get the most tax benefit from your donations. It works by bundling several years’ worth of donations into a single year. Suppose your annual charity donations are $5,000 per year, which might not be deductible in any single year (because your total deductions would be less than the $24,400 standard deduction for a couple). But what if you could fund the DAF with $20,000 in a single year. When combined with your other eligible deductions like state taxes, that entire amount would then be eligible for a tax deduction in the year it’s made, so that your interest payments, tax payments and other charitable contributions might all become deductible again in that year. Donating appreciated stock gives the added benefit of avoiding the capital gains tax (since the DAF wouldn’t pay tax on the sale of the stock).
A Donor Advised Fund functions a bit like your own mini-foundation. You could fund the DAF in a single year, then make your normal charitable gifts out of the Donor Advised Fund.
Some Less Simple Options
In today’s low interest rate environment, there are two additional options that can be attractive. The catch is that you need to work with an attorney who specializes in trusts and estates.
Charitable Lead Annuity Trust (CLAT). With a CLAT, the donor places assets into the trust, which then pays income to a charity at a set rate. At the end of a defined period, the assets then pass to the donor’s beneficiaries outside of the donor’s estate. Given today’s low interest rates, the rates required to be paid to the charity are quite low, and if the assets can appreciate more than that required payout rate over time, a donor can pass more to his or her heirs without incurring estate or gift taxes.
Charitable Remainder Unitrust (CRUT). Here, a donor places the assets into the trust and receives income over the life of the trust. The assets can be sold or held, and any income (including capital gains) are passed on to the owner over the term of the trust. When the trust term ends, the assets pass to a charity of the donor’s choosing. The advantage here is that the donor receives a current tax deduction for the expected remainder value of the gift to charity. Today’s low interest rates increase the expected future value of that gift, resulting in a larger donation today.
Clearly, these are complex gifting tools that should be discussed in depth with your attorney, tax advisor and financial advisor. It’s also important to remember that gifts to charity are not really about the tax deduction; they’re about supporting your community and the causes you care about. The tax deduction is merely a sweetener that makes such generosity a little easier.At Blankinship & Foster, we help you build a comprehensive financial plan that encompasses all your goals including philanthropy. We work with you to put your plan into action and to achieve the goals you set out to accomplish. Contact us to learn more about how we can help you.