Obtaining a significant tax benefit for charitable contributions may be a little harder than it used to be, but it’s not impossible. Here’s a look at how the tax landscape for charitable giving has changed and three strategies that could help taxpayers get better tax mileage from their donations.
What Has Changed?
Because the deduction for charitable contributions is an itemized deduction, taxpayers who claim the standard deduction generally receive no deduction for their contributions. That much hasn’t changed. What has changed is that taxpayers are less likely to benefit from itemizing due to higher standard deductions and other changes made by the 2017 tax law.1 But if they do, cash contributions are generally deductible up to 60% of adjusted gross income (AGI), versus the previous limit of 50% of AGI.2
Timing Donations With a Donor-Advised Fund
With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Generally, the donor’s recommendations will be followed, but the sponsoring organization has the final say as to how the money is actually distributed.
Contributions to a donor-advised fund are generally tax-deductible in the year they are made. So funding a donor-advised fund in a year you expect to itemize your deductions could provide a tax advantage. If desired, you could then put those dollars to use over several years by supporting your favorite charities through your donor-advised fund.
Donating Appreciated Securities
Many donor-advised funds and other public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held for more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold. Note that itemized deductions for contributions of appreciated securities are generally limited to 30% of AGI.2
A qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD).
To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. (Contributions to donor-advised funds are not eligible.) Up to $100,000 may be transferred annually.
Before implementing any tax planning strategy, be sure to discuss it with your tax professional. Each individual’s tax situation is different, and your tax professional can help you analyze the impact on your personal situation.
For more information about tax-friendly strategies for charitable giving, contact me, Crystal Wampler, or Amit Chandel, CPA, CTS, CTP, CTC, CVA, CTRS, CExP, CGMA, LLM (tax), Author, here or by phone at 562-281-1040. We are always available to answer any questions you may have.
1The Tax Cuts and Jobs Act of 2017.
2Technically, the percentage limit is applied to a taxpayer’s “contribution base.” Contribution base is AGI but without deducting any net operating loss carryback to that year.