The Wall Street Journal recently reported that charitable giving had its largest decline since the 2008-2009 financial crisis, citing circumstances such as 2018 tax-law changes and a late-year stock-market dip as the reasons for the decline.
At AAFCPAs Wealth Management, we know that taxes are not the reason you give; however, they may affect how much you give, the timing of your gifts, and the vehicle you use. We have outlined the following strategies for your consideration, so you may confidently continue your charitable endeavors while also optimizing your tax benefit.
Direct Your Required Minimum Distribution to a Charity
When you reach age 70½, you are required to withdraw a certain amount of money from your retirement accounts each year. That amount is called a required minimum distribution (RMD). The RMD is subsequently taxed as ordinary income for federal, state and local tax purposes. This additional taxable income may push you into a higher tax bracket and may also reduce your eligibility for certain tax credits and deductions. If your income exceeds a certain threshold, you may also be subject to increased Medicare premiums.
If you do not need your RMD to fund your expenses, you may consider directing all or part of the distribution annually to your charity(s) of choice through a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from your retirement account custodian, payable to a qualified charity. The QCD amount counts toward your RMD for the year, up to an annual maximum of $100,000. The QCD is not included in your gross income, allowing you to avoid or reduce the impact of RMD income.
Bunch Your Donations
The 2018 Tax Cuts & Jobs Act (TCJA) doubled the standard deduction to $24,000 for married couples and $12,000 for individuals. Additionally, the elimination and reduction of several popular deductions means many taxpayers will not collect the necessary deductions to surpass the new standard deduction threshold.
Bunching charitable donations is a strategy where donors make their planned giving for multiple years in a single year in order to exceed the new thresholds and take advantage of itemizing deductions. In off-years (or “skip-years”), you would take the standard deduction.
Direct Income to a Donor Advised Fund
You may continue to maintain the same cadence of charitable giving by placing the money in a donor advised fund (DAF) or private foundation. A DAF may be an attractive alternative to a private foundation because they have less administrative costs. A DAF is a giving vehicle which allows donors to use a wide range of personal assets to make a charitable contribution such as highly appreciated stock, real estate, art-work, business interests, and more. Once the asset is inside the DAF, the item can be sold without incurring a personal capital gain tax and while also receiving an immediate tax deduction. Note: Each asset type has unique tax considerations so please consult with an AAFCPAs Wealth Advisor to understand the implications of your planned donation. Your assets will continue to grow in value in the DAF, and you may direct grants to charities over time. Additionally, you may name children/ grandchildren as advisors or successor advisors to your DAF, allowing them to continue your charitable legacy.
There are a multitude of tax efficient charitable giving structures to consider, and AAFCPAs Wealth Management is available to discuss your unique situation and determine what is most appropriate for you.
If you have questions, please contact: Carmen Grinkis, PhD, CLTC, CFP® at 774.512.4061, firstname.lastname@example.org; Joshua England, JD, LLM at 774.512.4109, email@example.com; or your AAFCPAs Partner.
Many of AAFCPAs’ clients are engaged in philanthropy, nobly sharing the financial resources they are blessed with to support a range of causes. At AAFCPAs, we too have a commitment to volunteerism and giving. We celebrate the many nonprofits that enrich our lives by committing to donate 10% of our net income annually back to nonprofits.