Qualified Charitable Distributions, Donor Advised Funds and More – Charitable Gift Planning in 2018 and Beyond
With the passage of the Tax Cuts and Jobs Act (TCJA) last December, the landscape for charitable giving has changed significantly beginning in 2018. The charitable deduction has been expanded, allowing for a deduction of up to 60% of Adjusted Gross Income (AGI) for qualifying charitable contributions, up from the 50% of AGI limitation in prior years. However, with the near-doubling of the standard deduction to $24,000 in 2018 for married couples filing joint returns ($12,000 in 2018 for single filers) and new limitations on other itemized deductions such as property and sales taxes, it will be more difficult for many taxpayers to receive a tax benefit for charitable deductions in the coming years as many fewer taxpayers will be able to itemize deductions. Here are three strategies to get the most benefit out of your charitable contributions under the new tax law:
- Qualified Charitable Distributions (QCD) – QCDs are distributions from IRAs that are transferred directly to qualified charities. Rather than take a taxable distribution from your IRA and then give cash to a charity to receive an itemized deduction, Congress has allowed taxpayers age 70.5 and older to make distributions from their IRAs directly to qualified charities. Because the distribution goes directly to a qualified charity, it is treated as a nontaxable distribution, effectively giving you the charitable deduction offset directly to your income without having to itemize deductions to get the benefit. In a post-TCJA world, this will allow many taxpayers who don’t itemize to still get the benefit of the contribution. We expect QCDs to be utilized much more in the coming years as an avenue for charitable giving. There are specific rules related to this strategy, the most significant of which are that the taxpayer must be older than 70.5 to make a QCD, and the maximum QCD amount is $100,000 per individual per year.
- Bunching of Charitable (and Other!) Deductions – For those taxpayers who might not qualify for or need to utilize a QCD, bunching of charitable contributions every other year may be beneficial. This strategy would benefit taxpayers who either can’t itemize deductions or the benefit of their deductions is greatly limited due to the new increased standard deduction. For instance, a married couple with annual itemized deductions consisting of $5,000 in property taxes and $15,000 in charitable contributions would no longer get the benefit of either deduction as the combined deductions would not exceed the $24,000 standard deduction for married taxpayers filing a joint return. However, by doubling up on those payments every other year (ex. paying 2018 and 2019 property taxes and contributions in 2019), they could claim the standard deduction in one year and increased itemized deductions in alternating years. By carefully timing the payment of their deductions, this couple could increase their total deductions by as much as $16,000 every two years. There are certain limitations with each of these deductions, so you should discuss this strategy with your CPA.
- Donor Advised Funds (DAF)– See more information about DAFs in Natasha Naik’s article here (link). DAFs are beneficial for taxpayers who have charitable intent, but may not be able to itemize without the lump-sum funding ability of the DAF. A taxpayer can get a double tax benefit by funding their DAF contribution with highly appreciated stock from an after-tax account, effectively giving them a double tax benefit for the same deduction! Again, there are more detailed rules and restrictions behind the operation of a DAF, so please ask us for more detail if this strategy may interest you.
The above are a few of the charitable gifting strategies that are options for clients who are charitably minded and/or who already have charities identified that they would like to support monetarily. If you would like to discuss these or any other charitable gifting strategies, please don’t hesitate to give us a call.