Rethinking Tax Strategies for Charitable Giving

The 2017 Tax Cuts and Jobs Act made significant changes to the way itemized deductions are treated on your tax return. Common deductions include mortgage interest, real estate taxes and charitable giving. The IRS gives all taxpayers a basic reduction of income called a standard deduction. The new tax bill roughly doubled the amount of the 2017 standard deduction, thereby making it harder to claim an additional tax deduction by itemizing. The effect will likely be profound, as initial research estimates the number of taxpayers itemizing will fall by 50 to 70 percent in 2018. For married taxpayers, you’ll need more than $24,000 in itemized deductions in order to top the value of the standard deduction. Given the fact that interest payments and real estate taxes are required payments, it leaves charitable gifts as the item best suited for planning.       

Most charitable giving is not focused around tax strategy. Most charitably inclined taxpayers would likely give regardless of whether they receive tax benefits. We give away money for different reasons: to fight injustice, cure disease, support education and to offer a second chance to someone who needs help. So, if we are going to give to charity, and the rules of the tax game just changed, what should we do differently?

First, start planning now. Anything you do after year-end becomes a 2019 issue. Sketch out what you plan to give away in 2018; add in other deductions like real estate taxes, sales tax and mortgage interest; and compare that to the standard deduction for 2018 ($12,000 for single, $24,000 for married). One gifting strategy to consider is called “bunching.” Here you combine the value of multiple years of giving into one to boost the deduction. In off years, take the standard deduction. As always, consult with your tax professional.

Second, reconsider how you give. Most gifts are made in cash (cash, check or credit cards), which is inefficient from a tax perspective. If you have assets that have appreciated in value—stocks, mutual funds, ETFs or Bitcoin—you can give them away to charity and avoid paying capital gains taxes, plus you get credit for the gift on your tax return. You have to own the asset for at least a year in order to qualify. If you gift an asset you want to own, you can repurchase it immediately.

Finally, consider whether you could use more flexibility over 1. when you get a tax deduction, and 2. when your charity receives the money. This is especially useful if you “bunch” together multiple years of gifts into a single tax year. The IRS allows the use of an account called a Donor Advised Fund (DAF). Gifts of cash or appreciated securities are made to a charitable giving account, and the taxpayer receives a full deduction. However, the money can be distributed out to charity over multiple tax years. As the donor, you control the timing and to whom the funds are distributed. Using a DAF allows you to smooth out the timing of gifts, which sets an appropriate expectation for your charities and prevents them from having to manage swings to their receipts each year. You can set one up online in a few minutes. The largest DAF in the country is Fidelity Charitable, which is a good resource for more information.

A little charitable planning can help maximize the amount that your charities receive, which is what matters most. You’ll be well-served by digging into this conversation prior to year-end. After all, 2019 is right around the corner. 

The opinions expressed herein are those of PYA Waltman Capital, LLC and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product.

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