Charitable Giving: Changes to Tax Laws May Change How You Gift Going Forward

 In Planning Insights

As you are probably aware, our team actively gives back to local and global charities and we know many of you do as well. In that spirit we wanted to provide you with some changes that have been put into place regarding tax laws that may affect the way you gift to your favorite non-profits.

With the 2017 Tax Jobs Act, many more taxpayers will be using the standard deduction instead of itemizing. As a result, individuals who are used to charitable write-offs may no longer see a tax benefit from their contributions. This puts contributing to Donor Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs) in a new light.

Donor-Advised Funds (DAFs)

You may also consider front loading your charitable contributions while compounding your charitable impact, by contributing to a Donor-Advised Fund (DAF). One of the biggest advantages of a DAF from a strategic tax planning perspective is their flexibility: you make donations to the account and receive immediate tax benefits for doing so.

You receive the deduction in the year the contribution is made, with no expiration on when the contribution must be made to the charity of choice. In fact, there is currently no set time frame during which you must pay out the funds. The donation you make can grow in the donor-advised fund account indefinitely or be distributed right away. Think of this as your charitable savings account where donors can contribute to the fund as frequently as they like and make grants to their favorite charity when they are ready.

Donor-advised funds, like Schwab Charitable, – the 6th largest in the world – are recognized by the IRS as a tax exempt public charity or 501(c)(3), thus are eligible to receive tax-deductible charitable contributions. However, donations to DAFs are not eligible as a QCD.

Additionally, the 2017 Tax Jobs Act created higher standard deductions for tax payers, making it less efficient to write off charitable donations. Instead of donors bunching their donations every other year to get over the standard deduction threshold and causing a feast or famine cycle for charities they can qualify for a current year, itemized deduction and grant to charities on their own timetable by donating to a DAF.

DAFs might be useful for people who want to donate appreciated stock, mutual funds, exchange traded funds, or other securities.

Assets generally accepted include:

  • Cash equivalents
  • Publicly traded securities
  • Certain restricted, controlled, or lock-up stock
  • Mutual fund shares
  • Bitcoin shares
  • Private equity and hedge fund interests
  • Real estate
  • Certain complex assets, such as privately held C- and S-Corp shares

Donor-advised fund tax deductions include up to 60% of adjusted gross income for cash donation and up to 30% for securities. Whether the donation is securities, cash or both, you must itemize in order to take the deduction.

Qualified Charitable Distributions (QCDs)

Individuals claiming the standard deduction can still get a tax break for giving to charity, just so long as they are 70½ or older and transferring the funds from a traditional IRA directly to a qualified charity.

The QCD allows an individual to transfer funds from a traditional IRA directly to a qualified charity without the money being added to their adjusted gross income. If you are 70 ½ and have not yet taken your Required Minimum Distribution (RMD) for the year, then it can count toward your RMD for that year.

One of the most important caveats is that these distributions must be made directly to a qualifying charity. If it is distributed to an individual taxpayer first, then it will be considered a taxable event.

Many brokerage firms now allow individuals to order checks on their IRA accounts so that checks can be written and mailed directly to these charities. This is very convenient; however the taxpayer must be certain that the charity has cashed the check before the end of the year.

Always get a receipt from the charity for tax reporting purposes. The charity must be a 501(c)(3) organization. Individuals, private foundations and donor-advised funds do not qualify as recipients. There is also a cap on the amount that can be gifted income tax free each year at $100,000 ($200,000 for spouses filing jointly).

If neither of these options suit your gifting needs, please keep in mind you may gift up to $15,000 ($30,000 for spouses) per individual recipient in 2019. These gifts can be made tax-free either by check, transfer of funds, wire transfer or direct deposit into a 529 account.

Should you have any questions regarding Qualified Charitable Distributions, Donor-Advised Funds, or would like to learn more about them, please feel free to reach out to our wealth planning team.

All of us appreciate your continued vote of confidence in our work.

Your Team at Main Street Research