Charitable Gifts in the Current Tax Environment

The Tax Cuts and Jobs Act of 2018 made substantial changes to the tax code, and affected ability of many Americans to deduct charitable donations. Here are some strategies to help you maximize your tax savings while supporting organizations and causes that are important to you:

Give something, get something

Often we support a charitable cause by making a donation for which we receive something of value in return, such as a meal or a subscription. The deductible amount of your gift in these cases is the amount paid that is in excess of the fair market value of the item received. The charity should send you an acknowledgement to document the value of any goods you received for your donation, so you can calculate the deductible amount. Take time to review tax records and request such documentation, if you have not already received an acknowledgement letter from the charity.

Give someone else’s money – Employer Matching Funds

Many larger employers offer matching funds for donations to qualified charities. Rules vary, and charities may need to be pre-approved, so ask your Human Resources department or check your employer’s website for the procedures and forms you’ll need. Requests are often due well before the end of the year, so start early.

Give away your tax problems – Appreciated Stock

If you have a stock position that you would like to reduce, but you want to avoid capital gains tax, consider donating the stock. The charity can sell it without incurring tax, and you can deduct the fair market value of the stock. You should discuss this option with your financial advisor, as it can be a great way to reduce a concentrated position, re-balance your portfolio or dispose of stock with low basis or unknown basis. If you can’t document basis, you could be liable for tax on the entire proceeds of a stock sale, so donating might be a very good solution.

Donating stock takes a little longer than writing a check, so start early. Begin with your broker or custodian’s website where you should be able to find the forms. Make sure you can designate stock lots, so that you donate the most appreciated shares. Contact the charity for their procedures, DTC number, account number, contact information etc. Some charities have all this on their website, some you’ll need to call and ask for it. Let them know the donation is coming so they know whom to credit when it arrives. Follow up to make sure you get an acknowledgement letter for your records.

Give later, but take the deduction now – Donor Advised Funds (DAF)

Donor Advised funds, or DAF’s, are managed by a non-profit entity under the umbrella of a financial services firm, such as Vanguard Charitable, or they may be run by a community foundation. You set up an account to which you make donations. Your gift is complete when your donation is made to the DAF, and you’re entitled to a tax deduction at that time. The gift to charity can be made later, when you request or “advise” the fund to donate to a charity of your choice. This allows you to donate consistently while bunching your deductions into alternate years, which can be very helpful if you’re not able to itemize tax deductions every year. It’s also a very efficient estate planning tool, as you can name the DAF as a beneficiary in your trust. When you want to make additions or changes to your charitable beneficiaries, you can do it within the DAF easily, rather than paying your attorney to rewrite your trust. You can also nominate a successor advisor. Each custodian sets minima on donations in and contributions out, so shop around to choose the best fit.  Administrative costs are generally up to 0.6% depending on balance. The tax deduction is limited to 60% of Adjusted Gross Income (AGI) for cash gifts, and 30% of AGI for appreciated securities 

Give directly from retirement funds – Qualified Charitable Distributions (QCD)

If you’re over 70 ½ and own an IRA, you can make donations from your IRA directly to a 501(c)3 charity. These donations satisfy your Required Minimum Distribution (RMD), and are excluded from income. This allows you to deduct charitable contributions even if you are not itemizing deductions. This is important, especially since recent changes in the tax law mean that fewer of us are itemizing. By using QCD’s you can take the standard deduction and also have your charitable donations excluded from income. You can fulfill your RMD without adding to Adjusted Gross Income (AGI). Reducing your AGI can keep you from having to pay IRMAA (Income-Related Monthly Adjustment Amount), which keeps your Medicare Premiums lower. If you’re over 70 ½, own an IRA and make any charitable donations, you should ask your advisor or custodian about using QCD’s.

Things to watch out for:

• Donor must be 70½ or older, this does not mean “the year you turn 70 ½…” as with many IRA-related rules. Here you must not make the donation until the day you turn 70 ½.
• QCD is limited to $100,000 per taxpayer per year.
• Donation must be from a traditional IRA. If you want to donate from an employer plan such as a 401(k), you’ll first need to roll it over into an IRA.
• Donor-advised funds are not eligible to receive QCDs.
• Beneficiary IRA’s may be used if the donor is over 70 ½.
• Record-keeping is important. Distributions will be reported as “Normal Distribution” on your form 1099-R. This form does not identify the amount that is a QCD, so you must keep records.
• Plan ahead. If you’re taking RMD monthly, you need to set aside QCD amounts in January if you want to keep the monthly distributions even.

We hope you find this information helpful. Please consult your tax professional and financial advisor to see if any of these strategies might be a good fit for you. If you’re able to save on taxes so that you’re “doing well by doing good,” that’s a great thing for you as well as the charities you support.  Note:  This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your particular situation with a qualified tax professional.