We are entering the giving season when the majority of charitable donations are made. Most affluent individuals make charitable donations, but the vast majority continue to simply pay cash. That’s the most expensive and inefficient possible method to benefit their charitable causes. It’s easy to write a check or pull out your credit card, but it wastes any possible tax benefits.
Under the most recent tax act about 25,000,000 fewer households can even itemize deductions. That’s because the standard deduction has increased to $24,400 while deductions for state and local taxes are capped at $10,000 (married filing jointly). So, without a little simple planning many families will not get to use all or part of their gift as a deduction.
Here are a few ideas that will help you maximize your tax benefit from your donations:
- Bunch up your gifting to break through the standard deduction cap. Let’s suppose you routinely give $10,000 to a variety of charities. You could front load a few years gifting into a single year. Perhaps give $50,000 or $100,000 to make most of the gift deductible. If you cared to, you could establish a Donor Advised Fund to get the deduction now, and distribute the gifts over as many future years as you care to.
- Bunching donations may generate large deductions in a year when you have an unusually high income year from a commission, bonus, short term gain or other source.
- Offsetting a Roth IRA conversion is another great way to utilize bunched donations. As a planning technique to pass on income tax free assets to future heirs, avoid Mandatory Required Distributions (MRDs), or generate tax free income during retirement, a Roth Conversion can work wonders. But, converting to a Roth from a regular IRA generates ordinary income for the amount of the conversion. But, a gift from another source can offset that income.
- Give appreciated stock or properties. If you have low basis stock and plan to make a gift to your favorite charity, selling the stock would trigger a capital gain tax. But, gifting it directly to the charity provides you with the full value of the stock as a deduction, while avoiding the capital gains tax. It’s two tax benefits in one gift. This also can work with real estate, closely held corporations and Sub-S stock, restricted stocks, and options, and even art works.
- Rebalancing your portfolio may provide an excellent opportunity to prune outsized low basis positions without triggering a capital gain. Just gift the excess shares directly to a charity.
- For individuals over 70 1/2 facing MRD’s a direct gift from the IRA avoids the added income, but does not generate a tax deduction. Still it can be a big help controlling the tax bill.
I should mention that a Donor Advised Fund (DAF) might be a great way to time both deductions when needed and disperse over time. For instance, a $100,000 gift to a DAF could make gifts over the next five or ten years. The DAF is a 501(3)c charity subject to the same gifting limits as any other similar qualified charity.
Very large donors may still prefer a DAF over a private foundation for a variety of reasons. Both can be set up to make perpetual gifts. But, unlike a foundation a DAF is far simpler and cheaper to administer, can make anonymous gifts, and has no minimum annual disbursement requirement. If that’s you talk to your attorney, CPA or Financial Planner to decide what’s right for your family legacy.
Writing checks is easy and quick. But, a small amount of tax planning can pay big dividends for your charitable gifting, either reducing the after tax costs of your gifts, or maximizing your ability to give.
Investor Solutions can help you optimize your charitable gifting strategy. Call your advisor to discuss how we can work with you to fulfill your philanthropic vision.