When the Tax Cuts and Jobs Act increased the standard deduction, many predicted that charitable donations would decrease. While data about charitable giving for 2018 has yet to be released, we believe that this will not be the case. The U.S. is considered the world’s most generous country, having donated more than $410 billion in 2017 alone. In our opinion, Americans will continue to be altruistic – but will simply need to employ different strategies to reap the benefits on their taxes. Let’s review a few potentially tax smart options for charitable giving.
Donor-Advised Funds are maintained and operated by sponsoring organizations like financial services firms or community foundations. These funds essentially work as a charitable investment account, where the donor contributes cash, investments or assets and can take a tax deduction when the gift is provided. The contribution can be invested and potentially grow tax-free over time before the funds are distributed. While each sponsoring organization can determine its own rules, procedures and fees that affect the funds – that are, of course, within specific IRS guidelines – Donor Advised Funds are often seen as a tax-effective way to grant assets to 501(c)(3) public charities. Although the organization has legal control over contributions, the donor does retain certain advisory privileges. Since Donor Advised Funds are considered a public charity, contributors can often deduct a larger portion of their donations than if they had given to a private foundation.
Creating a private foundation can establish a legacy beyond your lifetime, give you control over your donations and potentially provide tax benefits for gifts of cash and publicly traded stocks. However, the IRS has strict limits on what you can deduct and give – with even stricter penalties for errors. Designated as a 501(c)(3), the private foundation must follow specific pay-out rules and operational guidelines determined by the IRS. A private foundation is a flexible charitable giving vehicle, but it does require considerable commitment, cost and management.
Another way to maintain charitable giving while possibly reaping tax benefits is to “bunch” your typical donations across several years. When you exceed the standard deduction, you’ll donate your stockpiled gifts all in one year. You’ll still be giving the same amount overall; the timing will simply be a little different. During the years you “skip” your donations, you’ll take the standard deduction.
When you turn 70 ½, the IRS requires you to start taking Requirement Minimum Distribution (RMDs) from your tax-deferred retirement accounts. This, however, may shift you into a higher tax bracket and reduce your ability to take advantage of certain tax breaks. To satisfy your RMD while supporting the organizations you care about, consider Qualified Charitable Distributions. QCDs allow you to make charitable donation using funds from an IRA (with a maximum of $100,000). If you use a QCD from an IRA the distribution counts toward your RMD, but is NOT included in taxable income for the year.
Remember – before you give, check with your financial and legal representatives to receive a personalized strategy based on your income, assets and filing status. Give us a call and we can get your started!
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