5 Ways to Maximize Tax Benefits for Charitable Gifts
Changes to the standard deduction under the Tax Cuts and Jobs Act (TCJA) of 2017, mean that many individuals will no longer itemize their deductions. Deductions such as the charitable contribution deduction may lose their utility. But, if you don’t have enough itemized deductions to exceed the standard deduction threshold you can still give generously and maximize your charitable tax benefits.
1. Lump Your Charitable Contributions
Every few years, consider lumping charitable deductions in order to clear the standard deduction hurdle. For example, consider doing 5 years’ worth of charitable contributions all at once.
This strategy may be more relevant for single, high-income taxpayers who do not have a mortgage, or for married couples who own property.
- High-income, single people without property can get close to the $12,000 standard deduction by getting up to the state and local tax (SALT) cap of $10,000, and then adding their charitable contributions. These taxpayers would see a tax benefit as long as total charitable contributions exceeded $2,000.
- For a married couple to get to the $24,000 standard deduction, they would have to use the $10,000 SALT cap with a larger amount of charitable contributions. If they have deductible mortgage interest that can bring them closer to the $24,000; Lumping charitable contributions may be less relevant.
2. Consider Setting Up a Donor-Advised Fund
This alternative, a donor-advised fund, is a contractual arrangement that you, as a donor, enter into with a sponsoring charity to establish an account that benefits your chosen charities. Donors can transfer assets to the account and receive an immediate charitable deduction, subject to adjusted gross income (AGI) limitations. Then, you can make grant recommendations to charities spread out over future years. There is no minimum amount or frequency of distribution requirement.
- The charitable gift is irrevocable.
- The sponsoring organization controls grant-making decisions, and has authority to accept or reject the donor’s recommendations.
- Grants may be geographically limited, though there may be some sponsoring organizations with a broader reach.
- This strategy cannot be used to satisfy pledges directly.
3. Gift Appreciated Stocks to Charity
Instead of just writing a check to charity, consider gifting low-basis stock. In addition to the charitable deduction (taken at the fair market value of the stock), you can get the additional benefit of bypassing any capital gains on the securities.
The charity can later sell the stock and pay no tax on the gain. Even if you took the standard deduction this year and didn’t get your charitable deduction, you still benefit from not having to pay tax on the capital gain.
4. Consider a Charitable, IRA Rollover
If you are 70½ or older and have one or more traditional IRAs, consider a charitable IRA rollover (also known as a “qualified charitable distribution” or “QCD”.) Although this strategy will not result in a charitable deduction, you can exclude the gifted amount, up to $100,000 per year, from your AGI, and it would count towards your required minimum distribution.
If filing a joint return, your spouse over 70½, may gift an additional $100,000 from their IRA. The lower AGI could result in additional tax benefits such as reduced Medicare premiums, reduced taxation of Social Security benefits, or reduction of exposure to the 3.8% tax deductions on investment income. This strategy is useful regardless of whether you itemize deductions or take the standard deduction.
- QCDs specifically excludes distributions to private foundations, donor advised funds, or supporting organizations.
- The rollover is excluded from income only if 100% of the rollover would qualify for the charitable deduction under present law. Rollovers to fund partial gifts won’t qualify (like gifts to split interest trusts, charitable annuities, or if the donor receives any quid pro quo benefit.)
- The exclusion applies to traditional IRAs and Roth IRAs only.
- Charitable rollovers will be reported to the IRA owner as normal distributions. Consult your tax preparer.
- If you have IRAs with non-deductible contributions or multiple IRAs, there are special rules in determining what portion of deductible and non-deductible contributions has been distributed as a QCD and what portion of the remaining IRA is treated as including non-deductible contributions. Some states may not follow federal tax law and will not allow an exclusion of the QCD from state taxable income. Consult your tax preparer regarding state taxability of QCDs.
5. Consider Setting Up Non-Grantor Trusts with 642(c) Language
Unlike individuals, whose charitable deductions are limited by AGI, complex trusts can deduct up to 100% of the net income in any given year. Deductible charitable contributions for a trust must:
- Be paid out of the trust’s gross income, and not from the underlying principal of the trust.
- Be paid pursuant to the terms of the governing instrument. The trust must be drafted with unambiguous authority to make charitable contributions.
- Be paid for a charitable purpose described in IRC Section 170(c).
You could donate enough investment assets to generate sufficient income to pay intended contributions. There would be no immediate income tax deduction upon initial funding of the trust. However, the future gross income of the trust will be offset with a charitable deduction.
- Work closely with an attorney to ensure the trust is drafted appropriately, and a tax advisor to make sure that the trustee’s charitable contributions are qualified. The downside to this strategy would be the professional fees associated with an attorney and annual tax filings. Also, remember that trusts are subject to higher compressed income tax rates than individuals. A cost benefit analysis should be considered to evaluate the best option.
- If you can make charitable gifts and not be impacted by the change in the standard deduction rules, remember that your overall charitable contributions are limited by your AGI. How much is deductible in a particular year is determined by:
- What type of property you give away (cash, long- term capital gain property, short-term gain property, tangible personal property, self-created property).
- What type of organization you give the property to—a public charity or a private foundation. Any excess charitable contributions are carried over for five years.
- You must comply with the substantiation requirement to claim a charitable deduction. That substantiation must be contemporaneous.