Article prepared by Tax Senior Manager Phil Levsky
With the Tax Cuts and Jobs Act of 2017 (the “TCJA”) increasing the standard deduction to $24,000 for joint filers and $12,000 for single filers, taxpayers with taxable income under these thresholds will receive a tax benefit for making charitable contributions. This alert discusses three potential strategies that taxpayers – regardless of whether they are under or over the standard deduction threshold – can consider to maximize their charitable giving efforts this year. In addition, this alert discusses one additional strategy for those taxpayer’s that are taking a Required Minimum Distribution (“RMD”).
Taxpayer Charitable Giving Strategies
Accelerate or Defer Charitable Contributions
Under the “Accelerate Charitable Contribution” strategy, taxpayers who make regular, annual charitable contributions, and who anticipate that their itemized deduction will not exceed the increased standard deduction threshold in 2018 may consider accelerating their 2019 charitable contribution into 2018. By accelerating their 2019 charitable contributions, taxpayers can increase their 2018 itemized deductions over the standard deduction threshold. Conversely for taxpayers whose charitable contributions will exceed their 2018 standard deduction threshold, but who anticipate that their 2019 giving will not, the “Defer Charitable Contribution” strategy would allow taxpayers to defer their year-end charitable contribution into 2019, thereby, increasing their 2019 itemized deductions above the 2019 standard deduction.
Use a Donor-Advised Fund
With a donor-advised fund, taxpayers can make a monetary contribution designated for charitable organizations today, while deciding which charitable organization(s) will receive the funds at a later date. In the interim, the donated funds will grow, tax-free, in the donor-advised fund until they are disbursed to the charitable organization(s) in the form of grants.
Taxpayers are allowed to deduct their entire charitable contribution in the tax year they contribute to the donor-advised fund, regardless of when the funds are distributed to a charitable organization. Therefore, for those taxpayers who would no longer otherwise itemize deductions in 2018 but who remain charitably inclined, a donor-advised fund would allow taxpayers to make several years’ worth of charitable contributions by the end of the 2018, thereby, increasing their 2018 itemized deductions over their 2018 standard deduction threshold.
Donate Appreciated Stock
Additionally, rather than making a traditional cash contribution by the end of the year, taxpayers may want to consider donating long-term stock positions (or stock they have held for over a year). This is also a useful strategy for taxpayers who may not have cash available at the end of the year for charitable contributions. By donating appreciated stock, taxpayers not only avoid capital gains tax, but also benefit from a charitable deduction equal to the fair market value of the stock (assuming the taxpayer itemizes their deductions). However, taxpayers should be aware that if they donate stock that has been held for less than a year, the deduction will be limited to the cost basis of the stock. In instances where the donated stock’s fair market value is lower than its cost basis, it is always better to sell the stock in order to capture a capital loss and then make a charitable contribution using the proceeds. Taxpayers considering this strategy should discuss the contemplated donation with both their charitable organization of choice as well as their brokerage firm regarding procedure and timing, especially if the contemplated donation is close to year-end.
Taxpayers with Required Minimum Distributions
Finally, for those taxpayers who do not expect to itemize deductions in 2018 and who are required to make a Required Minimum Distribution (“RMD”) in 2018, a Qualified Charitable Distribution (“QCD”) may be an effective strategy. The QCD strategy allows taxpayers to donate their RMD directly to a charitable organization. By using the QCD strategy, taxpayers may transfer up to $100,000 per year from their IRA directly to a qualified charitable organization. Such QCD contributions counts toward the RMD requirement and reduce the taxable amount of the IRA distribution. This approach reduces taxpayer’s AGI and taxable income, resulting in a lower overall tax liability.
Conclusion
While fewer taxpayers will be able to deduct their charitable contributions due to the increased standard deduction thresholds of the TCJA, there are still multiple tax planning strategies available to those who aim to maximize their tax benefit.
If you need assistance with a multi-year tax projection, establishing a donor-advised fund, or would like to discuss your charitable giving goals, please contact FGMK.
Phillip A. Levsky
Senior Manager
312.818.4327
PLevsky@fgmk.com
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.