When it comes time for tax planning, there are few emotionally charged decisions than those around charitable giving. People tend to have a deep, personal attachments to the causes they support and have been donating to their chosen charity for years or even decades. People view their donations as a vital way to give back to society and to feel connected to a wider community, whether it be on a local, national or even spiritual level.
The task of deciding where and how to donate has become more important, and even more complex, as a result of the Tax Cuts and Jobs Act of 2017, which reduced a key motivation for charitable giving. The near-doubling of the standard deduction for joint-filing married couples (currently sitting at $24,800) means that lots of families no longer get a benefit from itemizing their deductions, of which charitable donations has traditionally been a significant component. Only about 16 million households are estimated to have itemized their deductions in 2018, this is down from 37 million previously.
There are some early signs that charities are suffering the effects of this change. Individual giving fell to 1.1% in 2018 to $292 billion, or by 3.4% when adjusted for inflation, according to Giving USA 2019: The Annual Report on Philanthropy for the Year 2018. Giving by individuals has declined from 70% of total giving to 68% that year.
Options do exist for people to donate in a tax-efficient way, so long as they are willing to plan ahead. Most times, families are sticking with their old way of doing things without realizing that a change in their giving strategy can help charities and reduce their tax bill.
Here are three great tax strategies that individuals and families can adopt at any point in the year to make the most of their charitable giving:
Bunch your donations
Most philanthropically minded people should be considering bunching two years’ worth of donations into a single tax year and donating every other year rather than giving the same amount annually. This has always been a sensible tax strategy, but the drastic rise in the standard deduction has made it relevant for a much broader swath of households.
For example, take a family that has deductions of $10,000 in mortgage interest payments, $8,000 in property taxes, and wants to give $5,000 to charity. On an annual basis, the family would not have enough deductions to break through the standard deduction threshold and so they would get zero tax benefit from their donations. By bunching two years’ worth of $5,000 donations into the same tax year, they would surpass the standard deduction level by $3,200 and thus be able to reduce their taxable income by that amount.
Give from your retirement fund
Seniors often own their home outright and thus do not deduct mortgage interest, they are even less able to achieve tax benefits through itemized deductions. They do, however, have a powerful alternative in qualified charitable distributions (QCDs). If you are taking required minimum distributions, it may be advantageous for charitable giving to come out of your IRA account as QCDs.
These distributions, made permanent in 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act, allow retirees to avoid paying income tax on distributions up to $100,000 and can satisfy their minimum distribution requirement. The charitable donations get transferred directly from the IRA to a qualified charity, and the income never shows up on their 1040. This strategy also has a secondary benefit of reducing adjusted gross income (AGI), which may impact Medicare premiums and the taxability of Social Security benefits.
Give appreciated securities, not cash
The longest stock market bull run in U.S history has left a ton of people’s brokerage accounts inflated with unrealized gains. These profits are a great source of charitable gifts, but it is usually a big mistake to sell the stock and write checks to charities with the proceeds. The very moment you sell the stock, you will have to pay capital gains tax on the profit.
For an annual donations of $1,000 or more, you might be far better off transferring the long-term appreciated stock directly to the entity you want to support. The gain disappears, leaving neither you nor the charity on the hook for it. The one catch is that this does not lend itself to a last-minute scramble to organize your charitable donations at the end of December. It takes time to prepare the groundwork — for instance, making sure your qualified charity has a brokerage account, arranging the transfer, and time for the transfer to go through. You must give yourself a few months or more or, ask those questions now, at the beginning of the year, when the charities, like Giving Center, might be in less of a rush themselves.
If you are giving consistently to charity, it means you have given thought to who you want to support and your mission. It only makes sense, then, to give a little more thought to how you support a cause, too.
