The 2018 tax changes introduced some confusion with respect to the tax advantages of charitable donations. With the caps on State and Local tax deductions coupled with a virtual doubling of the standard deductions, many folks who have previously itemized deductions are now taking the higher standard deduction. What does this mean for the charitable donations? Many are still making donations, but due to the changes they’re ineligible for the income tax deduction associated with charitable giving.
If it looks as though you may lose out on the annual income tax charitable deduction, here are some options which may still offer you some tax benefits.
1. Consider increasing your charitable donations for one year over another. This may allow you to exceed the standard deduction for the larger contribution year. As an example, if I traditionally have given $5,000 per year, I may want to consider donating every other year, but doubling my donation to $10,000 for one year and zero in the next. The same amount is donated for the two years, but the larger donation year may offer the possibility of utilizing the charitable income tax deduction.
If you have both cash and stocks available to give and you’re uncertain which would be best to donate, consider giving the stock. This way you avoid paying capital gains tax on the gifted shares. Additionally, use the cash you were thinking of donating and use it to buy back the company’s stock. This way your gift was achieved, capital gains were avoided and you have the same stock back in your portfolio, but at today’s prices (no gains).
2. A Donor Advised Fund (DAF) can help reduce taxes in those years where income may be higher due to a bonus or a positive economic event. You can utilize the above mentioned strategies by gifting larger sums in one year and skipping the next and also gift appreciated securities.
Where a DAF can have advantages is, you haven’t gone ‘all in” with one charity. You have the ability to have the funds invested and distributed to the charities of your choice when you desire. Most major investment firms manage DAF accounts and will make available various investment vehicles to allow your donation growth potential prior to its ultimate distribution.
Be careful of the fees associated with a DAF. Most investment firms charge an annual fee which is in addition to the management fees associated with the underlying investments you choose. Every dollar paid towards management is a dollar not directed to your charities.
3. A Qualified Charitable Distribution (QCD) is a nontaxable distribution made directly by the trustee of your IRA to a charity. Unlike the prior discussions, this donation is NOT deductible, but rather Tax Free.
In effect, you request your IRA custodian to pay your Required Minimum Distribution directly to the charity of your choice. Instead of adding the RMD to your taxable income and making a charitable donation, you direct the RMD directly to the charity and avoid taxation all together.