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Charitable Planning After the TCJA Tax Law Changes

Quote: [Since TCJA], Charitable giving, in some instances, may not provide the same tax benefit as it once did.It can be argued that the most sweeping changes to the tax code in the past 30 years occurred last December, with the passing of the Tax Cuts & Jobs Act (TCJA). AAFCPAs Wealth Management urges clients to carefully consider charitable planning now. Charitable giving, in some instances, may not provide the same tax benefit as it once did. We would like to highlight planning techniques to consider in response to these tax law changes as part of your overall financial and tax strategies.

Charitable Stacking

The bar to receive a tax benefit for giving to a charity was raised in December 2017 when the tax bill was passed. In 2017, the standard deduction for individuals was $6,350 and for couples was $12,000. Going forward, the threshold levels were doubled, moving to $12,700 for individuals and $24,000 for couples.

As a result of this change—together with the cap of $10,000 on the combined deduction for real estate, excise tax, and state income tax—many donors will lose the incremental deduction for making charitable contributions. AAFCPAs encourages clients to consider “charitable stacking” as a strategy to continue to benefit from the same level of charitable giving.

How Does Charitable Stacking Work?

Say, for example, a couple gives away $10,000 to their favorite charities each year with a combination of stock and cash. This couple may now stack the amount by adding together multiple years in one year to get over the new higher standard deduction (i.e. $10,000 x 4 years = $40,000). In this example, the client’s deductions are now over the higher standard deduction, thus benefiting incrementally from giving to charities. See the illustration below.

Example of Charitable Stacking

Baseline 2018 Charitable Stacking 2018
Adjusted Gross Income $200,000 $200,000
Itemized Deductions:
SALT* Deduction Cap $10,000 $10,000
Mortgage Interest $5,000 $5,000
Charity $10,000 $40,000
Total Itemized Deductions $25,000 $55,000
Standard Deduction $24,000 $24,000
Taxable Income $175,000 $145,000
Incremental Deduction for Giving 10,000/40,000 to Charity $1,000 $31,000
Tax Benefit of 10,000/40,000 Donation $240 (2.4%) $6,820 (17.05%)

*SALT- State and Local Tax

Without stacking, the couple will receive a $240 tax benefit for donating $10,000 per year, or $960 total over four years.  With frontloading four years into 2018, the tax benefit is $6,820.

In cases where the couple wants to give each year and not every four years, they may consider establishing a Donor Advised Fund. A Donor Advised Fund is a charitable account that allows donors to make a charitable contribution to the fund, and get an immediate tax deduction in that year. The fund then provides grants to charitable organizations at the donor’s direction, over time (in some case years). Keep in mind that the charitable distributions from the Donor Advised Fund do not provide a tax deduction in subsequent years. Using a Donor Advised Fund as part of this charitable planning strategy allows donors to give consistently over time to 501(c)3s of their choosing.

Qualified Charitable Distributions

A Qualified Charitable Distribution allows an individual who is over 70 ½ and taking Required Minimum Distributions from an IRA to process a distribution that goes directly from their IRA to a qualified charity. This strategy, enacted as part of the Pension Protection Act of 2006, recently became a much more common planning technique when it was made permanent after a subsequent tax change in 2015. We advise clients that this strategy is not without some limitations. An investor cannot process a Qualified Charitable Distribution from an Inherited IRA, and the funds cannot be sent to a private foundation or a Donor Advised Fund.

The primary benefit of processing a Qualified Charitable Distribution is the potential large tax benefit that it provides. The tax benefit is significant considering that the direct distribution to the charity never hits your federal or state taxable income. Correspondingly, you cannot deduct the distribution to the charity as a contribution, which may not benefit you anyway due to the increased standard deduction. See the illustration below.

Example of Qualified Charitable Distribution

Baseline 2018 Qualified Charitable Distribution 2018
Adjusted Gross Income, Including $10,000 IRA RMD $200,000 $190,000
Itemized Deductions:
SALT Deduction Cap $10,000 $10,000
Mortgage Interest $5,000 $5,000
Charity $10,000 $ 0
Total Itemized Deductions $25,000 $15,000
Standard Deduction $26,600 $26,600
Taxable Income $173,400 $163,400
Tax $30,195 $27,827

In this example, the couple saves $2,368 in Federal Tax (plus $510 in MA Tax) by designating their $10,000 RMD to charities. The charities get the intended $10,000 and the couple saves $2,878 in Federal and state income taxes.

When you take your Required Minimum Distribution when you are 70 ½ and older, you run the risk of increasing your adjusted gross income to the point where it impacts other areas of your financial life (such as: deduction limitations, Medicare Part B, etc.). When you process a Qualified Charitable Distribution and send your distribution directly to a charity, you satisfy your required minimum distribution to whatever extent that you direct to the charity. It is important to note that the maximum limit you can direct to a charity from your IRA is $100,000 each year.

Deep tax expertise is applied to the foundation and execution of all financial plans and wealth management solutions. This insight allows us to proactively inform you of regulatory changes that will impact your planning efforts. We help ensure clients are fully aware of the tax implications of financial planning and investment decisions so there are no surprises at tax time.

If you have any questions about these tax strategies or your personal financial plan, please reach out to: Andrew E. Hammond, CFP® at 774.512.4143, ahammond@nullwealth.aafcpa.com, or your AAFCPAs Partner.

AAFCPAs Wealth Management’s mission is to provide valuable peace of mind to those who share the awesome responsibility to manage wealth.