Charitable Gifting Strategies for the End of the Year

Four charitable gifting strategies to consider before the end of the year.

As we approach the holiday season, three things always seem to remain constant. One, your stress level will probably increase. Two, your impending tax bill will start to take shape. And three, charitable organizations will be in need of your help. What can you do to make your charitable gifts stretch even further this year?

A 2012 GuideStar Survey found that roughly half of charitable organizations receive the majority of their donations during the last three months of the year!

One way to enhance the impact of your money is to leverage tax laws to their fullest extent. Simply put – every dollar saved on tax is a dollar more you can give to the organizations you are most passionate about.

Here are four strategies to consider to get the most bang for your buck:

Charitable Gifting Strategy #1 – Send your RMD directly to charity

The IRS requires you to take Required Minimum Distributions (‘RMDs’) from your traditional IRAs once you reach age 70½. These distributions are included in your income and taxed at the same rate as earned income (i.e. salary/wages), meaning you don’t get the advantage of lower capital gains rates.

If you don’t need the cash from your RMD, consider having your financial institution instead send it directly to charity. This strategy is called a “Qualified Charitable Distribution” (‘QCD’), and the main benefit is that the RMD will no longer be taxable to you.

Some important caveats:

  • Unlike regular charitable donations, you cannot claim a QCD as an itemized deduction
  • The check must be made payable to the charity (not you personally!)
  • The organization must be a 501(c)(3) entity
  • It is capped at $100,000 per year
Charitable Gifting Strategy #2 – Annual exclusion gifts

If you’d like to make gifts to children, grandchildren, friends, or other relatives, oftentimes the easiest way to do so is by writing a check. But beware! There are a few things to think about before you just hand that birthday check over to little Billy!

There is something called the “annual gift exclusion”, which is the total dollar amount you can give another person (besides your spouse) before having to file or pay gift taxes. For 2018 and 2019 that amount is $15,000 (periodically adjusted for inflation).  If you are married, you and your spouse can elect to “gift split”, meaning as a couple you can give $30,000 to any one person per year before gift tax comes into question.

If you give someone more than $15,000, you are required to file a gift tax form alongside your annual tax return (you are also required to file if you are gift splitting with your spouse).

It is important to note, however, that filing gift tax is not the same as paying gift tax. Under current law you can give up to $11,180,000 over your lifetime (excludes gifts to spouses, which are unlimited) before having to pay tax. And if you write a check directly to an educational institution for tuition or to a hospital for medical bills, this does not count towards the $15,000 limit either! This means grandma and grandpa can write checks to UVA for their granddaughter’s tuition, and at the same time give her a $15,000 personal check each year.

This strategy is typically used by wealthy families given the dollar amounts involved. The primary benefit is that it removes assets from your estate, which in turn can potentially reduce or eliminate estate taxes (the top rate is currently 40%).  Additionally, you are able to witness and take part in the joy of sharing your wealth with loved ones while you are still alive.

Charitable Gifting Strategy #3 –  Bunch annual, recurring donations into one single check 

Each year taxpayers have the option to take either a “standard deduction” or “itemize” deductions on their tax returns. A standard deduction is a set amount taxpayers can deduct from their income, determined by your marital status. Itemized deductions, on the other hand, allow taxpayers to aggregate specific expenses paid during the year (mortgage interest, state & local taxes, charitable donations, medical bills, etc.). If itemized expenses are more than the standard deduction, then taxpayers can subtract that amount from their income.

In practice, not all that many taxpayers actually itemize. As estimated by Forbes, roughly 25% of taxpayers itemize. Since the passing of the 2017 tax law, however – which doubled the standard deduction (ex: $12,700 to $24,000 for married taxpayers) – it is estimated that only 10% of taxpayers will itemize from now on.   

So while the lion’s share of taxpayers won’t notice a difference, for the remaining 10% it is now more important than ever to strategize on how to get over that “standard deduction hump”, especially for those who live in high-tax states since state & local tax deductions have been capped at only $10,000 per year!

One possible solution? Use a “bunching” strategy to combine several years’ worth of charitable donations into just one gift (and skip donations in subsequent years). By writing one large check – as opposed to a series of smaller, annual donations – you increase the likelihood your total itemized expenses will be greater than the standard deduction in that year.

 

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* Note: You can only deduct charitable donations up to 60% of your “adjusted gross income” (if made in cash).  There are additional tax considerations if you use the bunching strategy and donate more than 60% of AGI. Consult your tax advisor for more information

Example:

John and Jane have the following itemized expenses in 2018:

  • $10,000 in Virginia state income tax and property tax (the max)
  • $8,000 in mortgage interest
  • $2,000 to their local food bank (a donation they make each year)

Since the standard deduction is $24,000, they would not itemize expenses on their tax return this year. If they were committed to giving the food bank $2,000 each year, however, they could “bunch” several years’ worth of those donations into one large gift. For example, they could write the food bank a check for $8,000 (four years’ worth). This would bring total itemized expenses to $26,000, which is $2,000 more than the standard deduction. Assuming they are in the 37% tax bracket, this could save $740 in taxes ($2,000 x 37%)!

Charitable Gifting Strategy #4 – Donor Advised Funds 

A Donor Advised Fund (‘DAF’) is a spiffy name for what is essentially a charitable savings account. The way it works in practice is similar to any typical bank account, except in this case the money is used to benefit charity instead of you personally. Opening a DAF account is as easy as clicking a few buttons online through institutions such as Charles Schwab, Fidelity, or Vanguard. Some financial advisors also have the ability to open DAFs for their clients as well. 

Once the account is open the next step is to contribute assets such as cash, stocks, bonds, mutual funds, or even real estate and private business interests. You get an upfront tax deduction in the year you make the contribution (subject to IRS limits – read below).

What happens once the money is in the account? Just like any investment account, you can invest in products offered by the sponsoring institution (typically stock and/or bond mutual funds).  Then – at your convenience – you decide when, how much, and to which charitable entities you’d like to make donations. Donor Advised Funds are not taxable so any interest, dividends, and capital appreciation grows tax-free while you decide which charities to support!

Primary Advantages:

  1. You get an upfront tax deduction (up to IRS limits) in the year you make deposits into the account. If you contribute cash, your deduction is capped at 60% of your Adjusted Gross Income (‘AGI’). Example: if your AGI is $100,000 and you contribute $75,000 to a DAF, the most you can deduct from your taxes is $60,000 ($100,000 x 60% cap). Note there are separate limits if you contribute securities such as stocks or mutual funds, instead.
  2. Supercharge charitable giving by combining with other strategies. When combined with the “bunching” strategy (#3 above), you can “supercharge” your Donor Advised Fund with multiple years’ worth of gifts, get the upfront tax deduction, and still send money to your favorite charity each year.
  3. It gives you time to figure out which organizations you’d like to support. It is very common for people to have a desire to support charity, but they just don’t know which ones yet. A Donor Advised Fund gives you the benefit of an upfront charitable deduction and time to figure out which organizations you’d like to support. 
  4. Leave a legacy and streamline your estate plan. DAFs offer a way to potentially reduce estate taxes because it is not included in your estate (or probate) when you die.

You can name your children as successor owners of the account, so when you die your kids can step up and continue your philanthropic legacy. If you are concerned successor owners may stray from supporting the causes you originally inteded, you can instead name a beneficiary of the account as opposed to a successor owner. This means the DAF would be dissolved and a charity(ies) would receive the remaining balance outright at your death.

Disadvantages:

  1. Contributions are irrevocable. Once you put money in, you cannot get it back.
  2. The sponsoring institution does not have to listen to you. Technically you only make recommendations on which charities you want to receive donations. The sponsoring institution is not legally obligated to listen to you. In practice sponsoring institutions very rarely deny a request if the entity in question is a legitimate (a 501(c)(3) charity). Before you open a DAF, check the sponsoring institution’s list of pre-approved organizations – chances are very good that if it’s listed, the sponsor will listen to you.
Takeaways

These charitable gifting strategies may not be appropriate for all individuals. You should confer with your tax, legal, and financial advisors before deciding to implement any of these gifting strategies.

If you’d like to learn more about charitable gifting strategies and how it applies to your specific situation, please do not hesitate to contact us or leave your information on the “Contact Us” section of the website.

Disclosures1

1

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The information contained herein is provided for informational purposes, represents only a summary of the topics discussed, and should not be construed as the provision of personalized investment advice or an offer to sell or the solicitation of any offer to buy any securities. The contents should also not be construed as tax or legal advice.  Rather, the contents including, without limitation, any forecasts and projections, simply reflect the opinions and views of the author. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change without notice. There is no guarantee that the views and opinions expressed herein will come to pass.

This document contains information derived from third party sources.  Although we believe these third party sources to be reliable, Taylor Hoffman makes no representations as to the accuracy or completeness of any information derived from such third-party sources and takes no responsibility therefore.

Taylor Hoffman is not a Public Accounting firm, and the information contained herein should not be construed as tax advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their tax advisor for more specifics.

Taylor Hoffman is not a law firm, and the information contained herein should not be construed as legal advice. Rather the contents included are a reflection of the view and opinions of the author. There is no guarantee that the information provided fits every situation, and individuals should consult their attorney for more specifics.

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