Charitable Giving: A Changing Landscape

This time last year Altavista published my article on charitable contributions.  The article is again timely, so we thought it would be appropriate to circulate the content again through our e-newsletter.

Do you itemize or take the standard deduction?  Not an uncommon question around tax time.  If you have been itemizing you may no longer need to.  The Tax Cuts and Jobs Act has nearly doubled the standard deduction to $12,000 for singles and $24,000 for married couples filing jointly.

In addition to the increased standard deduction, some of the items you may have been itemizing are no longer deductible.  State and local tax (SALT) deductions have been capped at $10,000.  The miscellaneous deductions subject to the 2% of AGI floor have been eliminated.  The mortgage deduction has been limited to $750,000 of indebtedness starting in 2017.

So how might all this impact your charitable contributions?  Will you still make a gift if you no longer itemize?  Studies have shown that giving is done more in support of a cause and will continue regardless whether charitable contributions continue to be deductible.  In fact, for those who can itemize, the annual limitation of 50% of Adjusted Gross Income (AGI) has increased to 60% for cash gifts.  So, donations may actually increase.  What may change is how and when you make the gifts to best optimize any potential tax advantages.

A planning idea called “bunching” has become of popular topic as of late.  This strategy entails one looking ahead to make charitable contributions not only for the current year but for the year or years ahead.  The idea being that one would increase the charitable contribution and, in combination with other deductions, exceed the standard deduction and hence itemize for that year.  Then taking the standard deduction the following year(s).  Gifts could be made directly to the charity but if you are a large donor it would be appropriate to discuss your strategy with the charity so that they can plan accordingly.

The other idea would be to fund a donor advised fund (DAF) in the “bunching year” and then make your gifts each year to the charities as you would normally from the DAF.  The advantage here is the gift is deductible when it is contributed to the DAF and not when you disperse the funds to the charity of your choice.  This strategy also allows a donor to better meet the needs of the charity and possibly redirect funds to another charity if so inclined.

DAFs have other advantages in addition to facilitating the “bunching” strategy.  Many investors have appreciated stock positions that can be gifted to the DAF in a streamlined manner and then grants are easily distributed from the DAF administrator directly to the charity.  Many local community foundations operate DAFs and help donors research and select local charities that are aligned with the cause you choose to support.

An additional idea would be to look at one’s IRA as a source for charitable gifts.  We have found that many clients who have reached the age of 70 ½ and are now taking their required minimum distribution (RMD) from an IRA are taking advantage of the Qualified Charitable Distribution (QCD).  The QCD allows the Traditional IRA owner to name an eligible charity (not a donor advised fund) to receive the gift directly from the IRA custodian.  More than one charity may be named but gifts in total cannot exceed $100,000.  The distributions will satisfy some or potentially all that year’s RMD and not be included as ordinary income on Form 1040.  It may even open the door for a Roth IRA conversion by reducing income.  Be sure to discuss with your advisor to obtain all of the pertinent details before executing this plan.

If you are charitably inclined or already have charities you support, please consult with your Altavista advisor to discuss planning strategies now before the year-end gifting season gets underway.

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