Q&A WITH KENDALL W. KING
TAXPAYERS WON’T RECEIVE DEDUCTIONS FOR MANY 2018 CHARITABLE CONTRIBUTIONS
Q: What general rules apply to charitable contributions?
A: If you itemize your deductions, you may deduct charitable contributions of money or property made to qualified organizations. The amount of a contribution of property other than money is usually equal to the fair market value of the property. Generally, you may deduct up to 50 percent of your adjusted gross income; however, 20 percent and 30 percent limitations apply in some cases. For a charitable contribution to be deductible, the charity must receive some benefit from the donated property. The donor can’t receive any economic benefit (aside from the tax deduction) from the charity in return for the donation. In most situations, the deduction for a contribution is taken in the year the gift is made.
Q: In accordance with The Tax Cuts and Jobs Act of 2017, how do I know if I will receive tax benefit when I make charitable contributions?
A: The Tax Cuts and Jobs Act (TCJA) of 2017 changed the landscape for charitable giving. Due to the simplified tax filing process, it’s expected that a much smaller percentage of taxpayers will choose to itemize on their 2018 taxes. While charitable giving may not be motivated solely by tax deductions, those deductions have been an important part of the tax planning process and have often defrayed significant portions of the costs of donating. The biggest change is that the 2017 TCJA doubled the standard deduction that taxpayers can claim on their income tax returns without itemizing: from $12,700 to $24,000 for married couples filing joint income tax returns, and from $6,350 to $12,000 for single filers. There are also tax law changes that will greatly reduce the past benefits of itemizing. One significant change puts a $10,000 cap on state, local and real estate tax deductions, which will limit these deductions for taxpayers who make substantial payments in these areas. Additionally, many deductions simply have been eliminated. The clear result is that instead of itemizing, most taxpayers will use the standard deduction, meaning that many charitable contributions will not receive a tax deduction for the 2018 tax year.
Q: What types of assets are best to gift?
A: While cash is the most popular form of charitable gift, gifts of noncash asset, such as stocks or bonds, can be attractive because of the additional income tax savings they may bring. For example, if you sell your stock and donate the cash, you may pay capital gains taxes and diminish the tax benefit of giving the cash. By donating the stock directly to a charity, you may completely avoid the capital gains tax while enjoying a federal income tax deduction for the full value of the securities. This approach also preserves your cash for other uses. For maximum tax benefits, it is usually best to give the securities that have increased in value the most since you have owned them.
Q: What are Donor Advised Funds (DAFs)?
A: A DAF is a charitable giving vehicle sponsored by a public charity that allows a contribution to a charity, which is eligible for an immediate tax deduction, and then recommends grants over time to any IRS-qualified public charity. DAFs are best used for donors who want the tax benefit today, but who don’t want to give the money to charity just yet. A donor-advised fund effectively can function as a family foundation offering much of the appeal and flexibility of a private foundation — without the regulations, requirements and overhead expenses. When you establish a DAF, your donation has the potential to grow, tax-free (avoiding estate taxes), to an even larger donation as you take time to decide which worthy charities you wish to support. DAFs can take a variety of investments, and they aren’t required to distribute a certain number of assets each year the way private foundations are.
Q: Am I able to give money from my retirement accounts?
A: A taxpayer age 70 ½ or older is permitted to make a qualified charitable distribution (QCD) from a traditional IRA up to $100,000 each year. Using a QCD is a tax-savvy strategy that allows you to transfer up to $100,000 per year from your IRA directly to a qualified charity. QCDs are available only to IRAs and individuals who have reached the Required Minimum Distribution (RMD) age of 70 ½. Any amount processed as a QCD counts toward your RMD requirement and reduces the taxable amount of your IRA distribution. In effect, this will lower your adjusted gross income (AGI) and taxable income, resulting in a lower overall tax liability. It’s important to note that you need to transfer the money directly from the IRA to the charity for it to count as the tax-free transfer.
Q: For taxpayers age 70 ½ or older, which is better: the charitable deduction or the IRA RMD?
A: While most taxpayers age 70 ½ will benefit from reduced tax rates and expanded tax brackets, changes in the law also mean it’s less likely they will itemize deductions, instead opting to claim the higher standard deduction. You should review your giving strategy as it relates to minimizing your tax bill. As mentioned, when you claim the standard deduction, you get no financial benefit for any of your itemized deductions, including your charitable donations. You should consider a QCD in lieu of a traditional charitable contribution if you plan to take the standard deduction in 2018. It’s important that you talk with both your financial and tax advisers, who will help you make the right decisions (based on the new tax laws) that best reflect your charitable contribution goals.