Photo courtesy of pixabay.com

• Share

PRINT

When it comes to tax planning, there are few more emotionally charged decisions than those around charitable giving. People tend to see their donations as a vital way to give back to society and to feel connected to a broader community, whether it be on a local, national or even spiritual level.

The task of deciding where and how to give has become more important, and more complex, as a result of the Tax Cuts and Jobs Act of 2017, which reduced a key incentive for charitable giving.

The near-doubling of the standard deduction for joint-filing married couples (it stands at $24,800 in 2020) means that many families no longer get a benefit from itemizing their deductions, of which charitable giving has traditionally been a significant component. Only around 16 million households are estimated to have itemized their deductions in 2018, down from 37 million.

There are early signs that charities are suffering the effects of this change. Individual giving fell 1.1% in 2018 to $292 billion, or by 3.4% adjusted for inflation, according to Giving USA 2019: The Annual Report on Philanthropy for the Year 2018. Giving by individuals declined from 70% of total giving to 68% that year.

There are several options to donate in a tax-efficient way, so long as you’re willing to plan ahead. Here are three tax strategies to help your charities and reduce your tax bill:

Bunch your donations

Most philanthropically minded taxpayers should be considering bunching two years’ worth of donations into a single tax year and giving every other year rather than giving the same amount annually.

This has always been a viable tax strategy, but the drastic rise in the standard deduction has made it relevant for a much broader swath of households.

Consider a family that has potential deductions of $10,000 in mortgage interest payments, $8,000 in property taxes, and wants to give $5,000 to charity ($23,000 total). On an annual basis, the family wouldn’t have enough deductions to break through the standard deduction threshold and so would get zero tax benefit from their donations.

By bunching two years’ worth of their $5,000 in donations into the same tax year, they would exceed the standard deduction level by $3,200 (in 2020) and thus be able to reduce their taxable income by that amount.

Give from a retirement fund

Since older adults often own their home outright and thus don’t deduct mortgage interest, they’re even less able to achieve tax benefits through itemized deductions.

But they do have a powerful alternative in qualified charitable distributions (QCDs). If you’re taking required minimum distributions (RMDs), it can be advantageous to donate directly from your IRA account via QCDs.

These distributions, which were made permanent in 2015 as part of the Protecting Americans from Tax Hikes (PATH) Act, allow retirees to avoid paying income tax on distributions of up to $100,000 and can satisfy their minimum distribution requirement. The donations get transferred straight from the IRA to a qualified charity, and the income never shows up on their 1040.

This strategy has a secondary benefit of reducing adjusted gross income (AGI), which can affect your Medicare premiums and the taxability of Social Security benefits. [For more about required minimum distributions, see “New law changes RMD and IRA rules” in the January Beacon.]

Give appreciated securities

The longest U.S. stock market bull run in history has left a lot of people’s brokerage accounts inflated with unrealized gains. These profits are a great source of charitable gifts, but the moment you sell the stock, you’ll have to pay capital gains tax.

For annual donations of $1,000 or more, you may be far better off to transfer the long-term appreciated stock directly to a charity. The gain simply disappears, leaving neither you nor the charity on the hook for it.

The one catch is that this doesn’t lend itself to a last-minute scramble to organize your donations at the end of December. It generally takes time to make sure your charity has a brokerage account, arrange the transfer, and allow time for it to go through.

Give yourself a few months or ask those questions now, when the people who run the charity might be in less of a rush, too.

If you’re giving consistently to charity, it means you’ve given thought to who you want to support and why. It only makes sense, then, to give more thought to how you support them as well.

This article was written by and presents the views of Jaime Eckels, CFP, relationship manager at Plante Moran Financial Advisors. Check adviser records with the SEC or FINRA.

© 2020 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.