Tax-Efficient Charitable Gifting Strategies
The passage of the Tax Cuts and Jobs Act in December of 2017 was the most sweeping tax legislation enacted since the Tax Reform Act of 1986. One of the main provisions in the law was the near doubling of the standard deduction. Due to this, as well as the $10,000 cap that was placed on the SALT (State and Local Income Tax) deduction, fewer taxpayers will now take itemized deductions on their returns. Therefore, fewer taxpayers will receive a tax benefit for donating to charity. Hopefully, this will not deter people from making charitable donations, as those of us who are able should still donate to worthy charities because it is the right thing to do.
Despite these changes to the tax law, there are still several ways to receive a tax benefit for charitable donations. The first of which is simply to time your charitable donations to be made every other year. Also, time your other itemized deductions such as medical expenses, real estate, and income taxes (assuming they aren’t already capped at $10,000) to be made in the same year as your charitable donations. This strategy of bunching itemized deductions can in some cases, put you over the standardized deduction amount.
The donation of appreciated securities directly to a charity is also a great way to receive tax benefits from your charitable donations. And the good thing about donating this way is that you receive a double benefit. You do not have to pay tax on unrealized gain from the securities like you would if you were to sell them, and you also get a charitable deduction on your tax return equal to the fair market value of the securities at the time of the donation.
Another strategy would be to make a qualified charitable distribution from your traditional IRA accounts or inactive SEP and SIMPLE IRA accounts. A qualified charitable distribution is a distribution from your IRA made directly to a charity after you have reached the age at which you are required to take minimum distributions. This reduces your taxable income and may also help lower your Medicare premiums. Additionally, these distributions satisfy your required minimum distribution requirements.
The new tax law will also likely increase the use of donor-advised funds. Donor-advised funds are a great way to support charities you care about for several reasons. First, you can make contributions to a donor-advised fund, receive an immediate tax deduction, and then wait until later to actually make the donations to the organizations of your choosing. In the meantime, your investments contributed to the donor-advised fund, which can continue to grow tax-free, thus increasing the amount eventually given to charity. This strategy is especially beneficial for taxpayers who have a year when they experience an increased tax burden from the sale of a capital asset or other increases in income, such as a large bonus from work.
After you decide how much and to whom you would like to donate, it is important to implement strategies such as these to make sure you are receiving as much tax benefit as possible for your charitable donations.