Charitable Giving and the New Tax LawSubmitted by Dorval & Chorne on May 29th, 2018
By Daniel Dorval, CFP® | Tuesday, May 29, 2018
We have had several clients ask us about how the recent tax reforms affect how they should be thinking about their charitable giving. Many of these inquiries were a result of their tax professionals reaching out to make people aware of the changes purely from a tax perspective. Before I get into some of the potential impacts tax law changes may have on charitable giving, I would like to remind readers our planning focus is always centered on decisions that help improve quality of life rather than just tax consequences. From a pure quality of life perspective, the act of giving will always remain a benefit to both the giver as well as the receiver! Many studies have shown voluntary giving provides us with an opportunity to express of our own personal values and convictions which helps us potentially experience higher levels of personal health and happiness. We encourage everyone to remain generous with their blessings regardless of the tax consequences!
The new tax reforms became effective for 2018 and represented some of the most significant tax law changes we have seen in decades. The primary change for many as it relates to charitable giving is the near doubling of standard deductions to $12,000 for single people and $24,000 for married couples filing jointly. While charitable deductions were not technically changed, the ability to write off those contributions as tax deductions were affected for many people because they may no longer have enough total deductions to itemize. This is particularly true for many of the retirees we help. If you find yourself in the situation where you will no longer be itemizing deductions, there are a number of strategies you might consider to help improve the efficiency of your giving:
• You might consider bundling charitable contributions to help increase the likelihood of making them deductible. For example, if you normally give a certain amount to a charity each year, you might consider bunching two years or more of contributions into one larger contribution. If you decide to take this approach, we do suggest contacting your preferred charity and let them know this is how you would like to give because it may impact how that charity thinks about their ongoing donations.
• You might consider using a donor advised fund. Few people know about donor advised funds, but they will likely become more popular under the new tax rules. You might think of a donor advised fund as an investment account for making ongoing charitable contributions. You can fund your account with gifts of cash or other appreciated assets and take an immediate tax deduction for your contribution. From the perspective of the recent tax law changes, the donor advised fund approach might allow you to make a large one-time contribution that is deductible in that year while spreading the actual charitable gifts over many years in the future. This approach is generally more suitable for larger charitable gifts. There are a lot of different ways to set up donor advised funds, but many mutual fund companies offer convenient and inexpensive options to consider.
• If you happen to own highly appreciated assets such as stocks or real estate, you might consider making a direct gift of these assets to charity. This approach allows you to avoid paying capital gains tax on the appreciated asset while also allowing you a potential income tax deduction. The charity gets to recognize the full value of the contribution because charities do not pay long term capital gains when they sell an appreciated asset.
• If you or someone you know is 70 ½ or older and have a regular pre-tax IRA, then they may have the option of making a qualified charitable distribution from their IRA directly to their preferred charity. The charitable distribution counts against IRA required minimum distributions and, if done correctly, will not count as taxable income to you. While you will not receive a charitable deduction, this approach is the functional tax equivalent of getting a deduction.
It is also important to note that lower tax rates and higher standard deductions might mean more money in your pockets which might create more disposable income for charitable giving. Granted the gifts may no longer be tax deductible for some people, but we encourage everyone to consider their charitable inclinations more from a quality of life perspective and express their personal values through generous lifelong giving!
* The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisors Networks LLC., nor any of its representatives may give legal or tax advice.