Feeling charitable but hoping for tax relief? Learn how to make most of contributions
As we go about filing our taxes for last year and contemplate ways to lower our bill for the next time around, why not consider giving back and reducing your tax bill at the same time?
Giving to others can be very fulfilling and provides support to those in need. Our tax laws have even incentivized this by offering deductions for charitable contributions.
But one must itemize their deductions to take advantage, and much of this benefit has been lost since the Tax Cuts and Jobs Act drastically increased the standard deduction in 2018. It now sits at $27,700 — and that figure is $30,700 if both are over age 65. Indeed, only around 11% of filers actually have enough itemized deductions to make it worthwhile to forego the standard deduction.
This means that the tax benefit of charitable giving has largely been eliminated for most of us. But if you dig a little deeper, you’ll find ways to super-charge the value of your contributions and give back at the same time.
You might consider consolidating future years’ donations into the current tax year. This gives you a better chance that your total itemized deductions will exceed the standard deduction amount. Make the next few years’ worth of donations now to increase your deduction, then take the standard deduction in future years.
Establishing a donor advised fund
Maybe your organization counts on consistent donations rather than large lump sums, or perhaps you’re not ready to relinquish full control over two- or three-years’ worth of contributions just yet. You can set up a Donor Advised Fund, contribute enough to make itemizing in the current tax year beneficial, and parcel out the money as you see fit in future years while taking the standard deduction. There is no time restriction, you get the deduction up front, and you can even invest the funds and enjoy tax-free future growth. The catch is that any distributions from the account must be used for qualified charitable contributions.
Giving appreciated assets
This is my favorite way of giving. If you have any appreciated investment in a nonqualified investment account, you can donate some or all of it “in-kind” to the organization (or your Donor Advised Fund) and avoid capital gains taxes on the gain. For example, let’s say you purchased $2,000 of XYZ stock years ago, and it is now worth $10,000. If you liquidate it (even for purposes of donating to charity), you will realize an $8,000 taxable gain and pay long term capital gains taxes on that amount. A 20% combined federal and state tax would result in $1,600 of taxes. If instead you donated the XYZ stock in-kind, not only would you get to deduct the entire $10,000 but also avoid the capital gains taxes. Many charitable organizations have the ability to receive in-kind investment donations and are happy to facilitate stock transfers. Otherwise, a Donor Advised Fund may work better. If you’d like to donate but also hang on to your investment, why not consider donating the appreciated stock and buying it back immediately with cash? This essentially maintains your investment while raising your cost basis to the current market value.
Qualified charitable distributions
For those currently taking Required Minimum Distributions from retirement accounts, you may direct some or all of that amount (up to $100,000) directly to a charity and exclude it from taxable income.
While this is not a deduction, it does count toward your Required Minimum Distributions amount without adding to your taxable income and it does not require you to itemize to benefit from the strategy.
There are still a variety of ways to enjoy the tax breaks associated with charitable giving. We help our charitably inclined clients use one or more of these strategies to help achieve their charitable and tax goals. As always, you will want to consult with your tax professional and financial planner to see which of these strategies might work best for you.
Tyson Sprick is a CERTIFIED FINANCIAL PLANNER professional and a member of the Financial Planning Association of Greater Kansas City. He is a partner at Evolution Advisors, and he offers securities through Equitable Advisors, LLC, member FINRA/SIPC (Equitable Financial Advisors in MI & TN), which does not provide tax or legal advice and does not own or operate Evolution Advisors.