4 ways to give and get (tax benefits)

THIS POST WAS ORIGINALLY PUBLISHED IN DECEMBER 2018

My nephew just turned one in November.  My brother and his wife planned an elaborate “Polar Express”-themed birthday partyso that Eli could spend his birthday in his favorite PJ’s surrounded by 40 of his friends and family (and Santa Claus), eating pizza and smooshing a  huge piece of Polar Express cake into his face and hair. The rest of the guests spent the day cleaning up messy faces and diapers, putting people in time out, talking to each other accusingly with clenched teeth, and dealing with melt-downs.  Oh and drinking.  Definitely drinking.  

I don’t have kids but I’ve been fortunate (?) enough to attend many first birthday parties in my life. All of them have been BIG and LOUD and full of shrieking kids and frazzled parents and innocent bystanders (me). These events are planned with the best of intentions but end up going south at some point because—well, it’s a one year old’s birthday party full of one year olds and sugar (and hopefully wine)!

The Tax Reform Bill that went into effect January 1 of this year was actually passed almost a year ago. Happy birthday tax reform!  And with the first anniversary of the bill may come confusion, uncertainty and meltdowns as taxpayers learn for the first time what the implications of the bill will be and how the changes will impact their bottom lines.And since it’s the end of the year, many people may consider taking advantage of some charitable giving strategies to offset their tax bill while giving back to some favorite causes.  The tax bill made some changes to some of our favorite deductions and also increased the standard deduction to $12,000 single/$24,000 per couple, so some of these changes may affect whether and/or how much you give to charity this year.  Here are 4 charitable giving strategies to consider:

1.     Stock it to ‘em!

Take advantage of a great market run.  If you want to benefit a favorite charity, consider donating highly appreciated stock in your portfolio instead of a gift of cash.  In that way, you’ll likely make a larger contribution with stock than with cash and avoid paying capital gains tax if you had sold the stock.

 Keep in mind that the deduction you receive is based on the type of asset or gift you transfer to the charity.  In general, you can deduct a gift of cash up to 60% of your income.  For a gift of property or a capital gains asset, you can deduct up to 30% of income.  If you donate stock worth $100,000 with a basis of $50,000, you can deduct the amount up to 30% of your income AND avoid paying capital gains on the $50,000 gain if you had sold the stock.  Any unused portion of the deduction not taken this year may be carried over into the following years up to five years.

2.     Donate your IRA distribution and offset your income

Individuals age 70 ½ who have to take a Required Minimum Distribution (RMD) from an IRA account may make a qualified distribution from an IRA to a charity (QCD).  This allows you to benefit a favorite charity by using retirement assets that you would otherwise have to take and pay taxes on.  There are a few caveats to remember:

-      You must be age 70 ½ to make a QCD

-      You can only give up to $100,000 to a charity (or charities) from an IRA

-      This can only be done with IRAs; you cannot use your RMD from a 401(k) or employer plan to make a QCD

-      You don’t get a tax deduction against the amount of the distribution.  Instead, the distribution transferred to the charity will offset your AGI in that year, which may also provide a substantial tax savings.

This may be an important strategy to consider in light of the limits on itemized deductions and an increase in the standard deduction imposed by the new tax reform bill.  A QCD may help some people mitigate taxes further even if they can only claim the standard deduction. 

3.     Consider a donor advised fund

As I mentioned, the tax reform bill did away with or limited certain itemized deductions and increased the standard deduction.  Many charitable organizations feared that this may keep potential donors from making large gifts as the limitations on deductions may crimp the incentives of giving.  A donor advised fundis a giving vehicle offered by a charity or financial institution that allows a donor to make an immediate one-time gift, invests the asserts for growth and allows the donor to make recommendations for where the assets/donation should go over time.  

By making a gift to a donor advised fund, you may be able to make a large one-time gift that will be meaningful enough to go above your standard deduction, but you can spend the next several years directing the institution where you want your funds to go. 

4.     Clump or bunch your deductions

In light of the changes in the tax bill, many planners are recommending a strategy to switch from taking the standard deduction in some years to bunching your deductions and itemizing in other years in order to save taxes in the long run.  For example, in years one and two, a couple may take their standard deduction of $24,000 and forgo making any major charitable gifts in those years.  In year three, they may make a cumulative gift of $30,000 which would exceed the standard deduction so they would itemize in that year.  In years four and five they may take the standard and then in year six make another gift of $30,000 and itemize.  In that way they have made a $60,000 charitable gift in six years but have taken advantage of the deductions available to them every year.

Individuals may optimize their deductions by bunching deductions during years in which their medical expenses are high; in that way, they can combine charitable giving with other deductions like medical expenses, mortgage interest and state tax (limited to $10,000). 

An advisor and your tax professional can help you develop a charitable giving strategy so that you can give to the organizations you care about and get the deductions for which you are entitled.  And no meltdowns.

This article is not intended to be legal advice.  Please consult a tax professional to determine the appropriate charitable giving and tax strategies to meet your financial goals.