Think Tax Reform is likely to discourage charitable giving? Not at all. The Tax Cuts and Jobs Act may have lowered individual income tax rates, reduced the value of tax deductions, and doubled the estate tax exemption to $22 million for couples, but it will not impact all tax-motivated bequests. Millions of passionate non-itemizers contributed to non-profits and charitable causes that they cared about under the old tax law and many will continue to do so now that tax reform is a reality.
Actually, because fewer taxpayers will be subject to estate and gift taxes, more opportunities exist to benefit charities. Consider this: untaxed retirement accounts make up a growing percentage of estate value. Since they are ultimately taxable for heirs, it may be worth considering using these untaxed assets to fulfill charitable bequests and leave other appreciating assets, such as real estate, to loved ones.
On the plus side, the new tax law increases the percentage limitation for contributions of cash to public charities to 60% of adjusted gross income, which is the amount you can write off in a given year and promises to benefit many donors come tax season. This rule is often misunderstood because folks confuse wealth and income. High net worth individuals often have relatively low taxable income. Assets can grow in value yet generate little or no taxable income until the taxpayer actually sells them or takes a distribution from a tax-sheltered account like an IRA. Gifts of stock remain deductible at up to 30% of income. You still have up to six years to use your charitable deductions before they are lost. More good news: the law also repealed the Pease amendment’s limitation on itemized deductions for high-income taxpayers through 2025.
Most folks don’t give to charity just to get a tax deduction. Let us suggest several attractive giving options and gift techniques to consider.
Stuck between the idea of giving your favorite charity cash or giving appreciated assets like stock? Give the appreciated assets because there are two tax benefits to be had: 1) the income tax deduction, and 2) avoidance of the capital gains in an appreciated asset. When you give cash you get only the first benefit, but if you give a capital asset like appreciated stock, you can deduct the full market value of the investment without having to pay capital gains tax on the appreciation. You don’t recognize the gain and you get the deduction to apply against different income.
If you’re charitably inclined, you may wish to consider a Charitable Gift Annuity. Using appreciated assets to fund a charitable gift annuity lets you postpone the recognition of the capital gain and pay it over a period of years. It can combine the benefits of an immediate income tax deduction and a lifetime income stream. Plus it can reduce the size of your future taxable estate. How does it work? You make a gift of cash or other property to a charity in exchange for a guaranteed income annuity for life. For you to claim a charitable deduction for a portion of the annuity purchase price, the charity must receive at least 10% of the initial net value of the transferred property.
Another great giving vehicle is the Charitable Remainder Trust. A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce taxable income by first dispersing income to the trust beneficiaries for a specific period and then donating the remainder of the trust funds to your designated charity. You can take an income tax deduction spread over 5 years for the value of your gift minus any income received from the property. You can receive an annuity or set up your annual payment as a percentage of the value of the trust. CRTs work well with appreciated assets also, like stock, securities, and real estate. Charities don’t pay capital gains tax, so if and when the charity sells your property, the proceeds stay in the trust and aren’t taxed. When the trust property eventually goes to the charity, it’s no longer in your estate and it isn’t subject to federal estate tax.
Charitable Rollovers are a good strategy for taxpayers who are 70 ½ years or older and required to take minimum distributions from their retirement accounts. You can request a direct asset contribution of up to $100,000 from your account to a qualified charity. It can be counted toward the required yearly IRA distributions and the income will not be included in taxable income, but unfortunately you won’t get a charitable contribution deduction.
Donors can use strategies like “Bunching” Charitable Gifts into a single year instead of paying them out over a number of years to meet the threshold for itemizing. When making a large gift to exceed the standard deduction amount in order to claim the itemized deduction benefit, consider vehicles such as Donor Advised Funds and Charitable Lead Trusts which allow you to have a voice in how and to whom those funds are disbursed over the years ahead. However, to use that strategy, clients need to plan ahead. This is a great strategy when clients have high tax bill due to the sale of a business, stock, or real estate, and are looking for an increased charitable deduction to offset against an increase in income.
Most taxpayers may still continue donating to their favorite charity no matter what deduction they can or cannot claim. You could look at it from another perspective and say that an increased standard deduction translates into a modest tax reduction, and probably frees up some cash for folks to contribute to their favorite cause or charity. Remember some of the biggest tax advantages for donations were left untouched by Tax Reform. Donating appreciated stocks, bonds or other assets instead of cash still avoids all capital gains taxes whether or not a donor itemizes. Don’t want to change your investment portfolio? Take the cash you would have donated and buy identical stocks, bonds or other assets to replace the donated ones. FYI – there is no waiting period or “wash sale” rule for appreciated assets. Your portfolio is the same, but the “new” asset now has 100 percent basis, meaning that no capital gains taxes will be paid on any past appreciation.
When claiming a charitable contribution deduction, be sure to follow these steps:
- Make sure the non-profit organization is a 501(c)(3)
- Keep a record of the contribution or the tax receipt from the charity
- With non-cash donations a qualified appraisal may be required to substantiate the value and the deduction you’re claiming
- Send the paperwork to your Fuoco professional for preparation of your tax return.
For our non-profit clients, let us say this: people donate because they are passionate about a cause, and tax reform gives itemizers and non-itemizers, as well as corporations, more money to give. There are ways charitable organizations can adapt to tax reform. Constructing a multiyear budget will allow for volatility in revenue (remember those “bundling” donors) and long-term planning. Open communication with donors regarding the need, the gifting vehicle, timing and size of their planned contributions is critical.
Contact us: Clients might not be affected by the increase in the standard deduction in terms of the amount of their charitable giving, but it’s still a good idea for everyone to plan ahead to pick the perfect gifting solution. We can help donors navigate the tangled web of tax reform and donation options, and assist with the complex calculations related to charitable gifts like the carryover charitable deduction, and applying it in following years. Our professionals are ready to work with you to achieve your charitable goals as well as your financial ones!