Charitable giving and philanthropic work have long been pillars of American culture. The Almanac of American Philanthropy ranks Americans atop the list of the most charitable givers in the world. Giving is not only celebrated, but encouraged, as taxpayers are allowed to deduct charitable contributions on their annual income tax returns. While charity is on the rise—a June 2018 news release from Giving USA states that charitable giving surged to more than $400 billion in 2017—tax reform may have implications for individual donors, who represent 70% of total giving. With year-end approaching, it is important for taxpayers to understand what is changing and how to maximize charitable donation deductions going forward.
Individual taxpayers can claim a deduction for charitable contributions when filing Schedule A Itemized Deductions with their 1040 tax returns. Schedule A is used when the sum of itemized deductions, including contributions, exceeds the allowable standard deduction.
The Tax Cuts and Jobs Act, passed by Congress in 2017 and effective for the 2018 tax year, considerably raised the standard deduction to $12,000 for a single filer and $24,000 for a married couple filing jointly. The increase in the standard deduction makes itemization a difficult hurdle to cross, and many will find the benefit of itemizing less than the benefit of the standard deduction beginning in 2018. The estimate is that fewer than 10% of taxpayers will itemize in 2018, down from 30% in 2017. So, how can an individual taxpayer itemize to take advantage of the charitable contribution deduction in 2018?
One strategy to consider for itemizing deductions is “bunching” gifts in a specific year, while limiting donations in other years. If “normal” charitable giving is $6,000 per year, a taxpayer would give $12,000 every other year, or $18,000 every three years. The larger charitable contributions, combined with other allowable itemized deductions, like property taxes and mortgage interest, will increase the possibility of exceeding the standard deduction and afford additional tax savings in those specific years. But what if you want to make gifts to a non-profit every year, regardless of the tax consequences?
Donor Advised Funds
Donor Advised Funds (DAFs) is another option to help individuals reach both tax and philanthropic goals. Fidelity Charitable and the National Christian Foundation are examples of organizations that maintain DAFs. Individuals can fund a DAF account (think of it as a sort of holding account) with a small amount, sometimes as little as $5,000.
For tax purposes, the charitable contribution is considered “donated” when the money is deposited in the account, regardless of when the donation is eventually granted to the non-profit agency. The individual donor has the discretion to give gifts (or grants) as they wish to qualified charities. By depositing multiple years’ normal charitable contributions into a DAF in one year, one can then grant annually to the non-profit in each of the next three years. This allows an individual to maximize his or her charitable contributions in one year for tax purposes, but does not disrupt the cash flow of the non-profit agency—a “win-win.”
Cash, securities, or appreciated assets can be used to fund a DAF account. Appraisals may be needed for non-cash contributions, such as securities or appreciated assets, if above certain levels, and/or for certain types of assets. Before proceeding with this option, it is important for a donor to consult the specific agency that holds the DAF, to be certain it will fit his or her needs.
Direct IRA Distributions
Taxpayers over age 70 ½ may consider another strategy for taking deductions, if they are unable to itemize: channeling a required minimum distribution directly from an IRA to a qualified charity of choice. Because this direct distribution bypasses the donor, it is not counted as taxable income. This option eliminates the income AND the charitable contribution deduction, but affords one the opportunity to take advantage of the standard deduction. An important note, though: these Qualified Charitable Distributions can only be made from IRA accounts, not 401(k) or other retirement benefit programs. One must be at least age 70 ½, and the maximum allowable distribution amount annually is $100,000. The investment company managing the IRA (i.e., Fidelity, Regions, etc.) can assist with the mechanics of this transaction.
With any charitable giving, there are always important rules to remember:
- Only donations to 501(c)(3) public charities or private foundations are generally deductible as qualified charitable donations.
- A DAF has even more restrictions on qualified grantee organizations, so one should ensure the fund allows for donation to the specific charity of one’s choice before funding the DAF.
- While most charitable deductions are limited to 60% of adjusted gross income (up from 50%, due to tax reform), some are limited further to 30% (or even 20%), so total income is an important consideration if one plans to deduct. Gifts given to benefit specific individuals are not deductible; this includes most GoFundMe® campaigns.
- Keep appropriate records of your contributions. Any contribution over $250 must be acknowledged with a receipt from the charity. Your canceled check is not sufficient proof in the event of an IRS audit.
- Any non-cash contribution over $5,000 will most likely require a qualified appraisal to substantiate the value (publicly traded stock may be an exception).
There are more than one-million public charities in the United States, including churches, schools, artistic organizations, and humanitarian aid charities that rely on charitable contributions to further their missions. PYA can ensure you are making donations that best serve organizations, while helping you maximize tax benefits. If you need assistance in developing individual tax strategies, or have questions about tax and estate planning, contact one of our PYA executives below at (800) 270-9629.
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