Charitable Giving: What You Need to Know
The holiday season is a time to reflect, be thankful for what we have and help others in need. Thanksgiving is also a time where families gather, and it’s a great time to engage your children and extended family in your charitable strategies and traditions. However, before you write that check, there are many things to consider because of changes implemented with the new tax laws. For example, have you thought about bunching deductions, gifting appreciated securities or giving to charity through your IRA?
Lucas Capital Management has extensive experience in the non-profit world, both advising clients as well as active participation. There are a few specific ideas we encourage you to consider as you set your giving plans for this year to make the most for you and the charities. The ability to help others is a blessing, and by employing tax-efficient strategies, it expands the good work that you and your family intend.
New Tax Laws Have Changed Charitable Giving
The new tax law brought substantial changes that affect how we have traditionally approached charitable giving, so make sure you understand how it may impact your donation decisions. The Tax Cuts and Jobs Act of 2017 might have you asking whether you should modify your plans for giving to the causes you support.
Many tax payers will no longer itemize deductions eliminating the tax benefit for charitable giving. The new law substantially increased the standard deduction, which now stands at $24,400 for couples and $12,200 for single filers. In addition, the cap on state and local tax deductions at $10,000 results in many of us taking the standard deduction. Charitable deductions only provide a tax benefit if you itemize your deductions, which means your giving strategies might need to be revised.
Following are 5 specific strategies to get the most from your charitable giving:
1. Consider “Bunching” Your Charitable Giving
One strategy to consider is to bunch two years of giving in one tax year and then delay giving again until year three. By bunching two years’ donations, your itemized deductions might exceed the standard deduction, allowing you to receive the tax benefit on the years that you give and accepting the higher standard deduction on the years in between.
Remember that the difference in a tax year is one day. For example, if the year for bunching is 2020, then make your 2019 gifts on January 1, 2020 and your 2020 gifts in December 2020. Your gifts are still annual gifts one year apart so that you manage both your cash flow and the receipts to the charities.
2. Donate Appreciated Securities
Charitable contributions of long-term appreciate assets can be one of the most tax efficient ways to give. This will save you the capital gains tax that you would otherwise pay if you sold the securities while allowing you to deduct the stock’s full market value. Most charities will accept appreciated securities as a gift.
3. Donor Advised Funds Facilitate Concentrated Giving
Donor Advised Funds (DAF) allow you to delink the time of making tax-deductible charitable gifts from your support of charities. You can establish a DAF with a single large donation that you itemize and deduct in the first year. Your contribution can include cash, appreciated stock or other assets. You then distribute the fund during the next several years to the charities you recommend. Furthermore, the earnings from invested DAF contributions are tax-free, which might boost the amount of future donations from the fund.
Our long-time partner, Community Foundation of New Jersey, offers Donor Advised Funds managed by Lucas Capital. We are very proud that CFNJ has just been honored as one of New Jersey’s top charities.
4. Learn About Charitable Gift Annuities (CGAs) and Charitable Remainder Trusts (CRTs)
The irrevocable donations to either a CGA or a CRT are deductible if you itemize. A CGA is an annuity contract between you and a charitable organization. The annuity generates a lifetime stream of income. The income you receive usually includes tax-free return of principal. Upon your death, the CGA assets are distributed to the charity. CRTs are irrevocable trusts that pay income to beneficiaries for a specified period, after which the remainder goes to the designated charities.
Charitable donations can still play a significant role in your tax, retirement and estate planning. The right strategies can earn you tax benefits and might provide partially tax-free annuity income while reducing your taxable estate.
5. Unlock the Power of IRA Charitable Distributions
You can use Qualified Charitable Distributions (QCDs) to satisfy the required withdrawals from your IRA. Your traditional IRA mandates that you start taking Required Minimum Distributions (RMDs) after age 70-½. If you make charitable gifts annually to your church or favorite non-profit organizations, there is no reason to miss the tax-saving opportunity of funding it with your RMD.
You will reduce your income taxes by using all or part of your RMD as a QCD to an eligible organization. You can exclude up to $100,000 a year ($200,000 for joint filers) from your RMD through QCDs. If you are in the 35 percent bracket, that’s a tax savings of up to $70,000 per year. You must follow certain rules to benefit from a QCD. For example, you must have an acknowledgment of the charitable gift from the recipient. Also, your IRA custodian or trustee must distribute the gift directly to the recipient. Please see our article One of the Best Tax Strategies for Retirees – Charitable Gifts from your IRA for more details.
The Role of Your Financial Advisor
Your financial advisor can work with you and your family to set up a comprehensive charitable plan that provides benefits to your favored charities as well as to your own wealth accumulation and preservation plans. Furthermore, an advisor can help you develop a financial plan that builds, preserves and deploys your wealth to meet your life’s goals while minimizing your tax burden.