Charitable Contributions and Year-End Tax Planning

Among the many modifications enacted by the 2017 Tax Cuts and Jobs Act (TCJA) was a major change to the standard deduction, which eliminated separately tracking itemized deductions, such as charity donations, for many taxpayers.

The 2019 standard deduction is $12,200 for individuals;$18,350 for heads of household; and $24,400 for married couples filing jointly (increased from 2018 thresholds of $12,000 for individuals; $18,000 for heads of household; and $24,000 for married couples filing jointly.)

Contribution Basics

The recipient of a charitable donation must be duly qualified, which rules out friends, relatives, and any other person or group who lacks tax-exempt status as determined by the U.S. Treasury. The list of eligible entities includes organizations operated exclusively for religious, charitable, scientific, literary, or educational purposes; the prevention of cruelty to animals or children; or the development of amateur sports. Nonprofit veterans’ organizations, fraternal lodge groups, cemetery and burial companies, and certain legal corporations can also qualify. Even a donation to a federal, state, and local government may be eligible if the donated funds are earmarked for charitable causes; however, political contributions are not deductible.

Many taxpayers donate clothes, household items, and more to Goodwill, the Salvation Army, and similar charities. But these types of noncash gifts have their own rules. Used clothing and household items must be in usable good condition; additional regulations apply to vehicle donations. You can’t claim the new value for a noncash donation, but must use the fair market value which would be similar to a thrift store value.

Consider the following strategies in planning your charitable contributions through the end of 2019:

Strategic Bunching of Contributions

For those close to the itemizing threshold reflected in the standard deductions noted above, it may make sense to group contributions for maximum tax impact, combining several years of anticipated gifts into a single year. For example, you could choose to donate in one year what you might have given over two years, then skip a year. This strategy particularly makes sense if you expect your income in a given year will push you into a higher tax bracket; this is especially true for those who are paid on commission. Bunching charitable deductions in a higher bracket year maximizes the tax benefits of giving.

Gifting Appreciated Stock

Unlike cash gifts, donating appreciated stock directly or through a Donor Advised Fund has a major additional tax advantage – the gift is measured at the current fair market value of the asset contributed, and the built-in gain goes untaxed. Giving a non-cash gift to charity can help you tax-effectively reallocate a portfolio, reduce capital gains, avoid estate taxes, or minimize taxable income to support your overall financial strategy. There are, however, separate AGI (adjusted gross income) limitations on how much may be gifted in a given year, with the possibility of carrying forward amounts in excess of the limitations.

Qualified Charitable Distributions (QCD)

Normally, a distribution from a traditional IRA incurs taxes since the account since taxes have not yet been paid on account deposits and earnings. But account holders 70½ or older who make a contribution directly from a traditional IRA to a qualifying organization can donate up to $100,000 without it being considered a taxable distribution. The deduction effectively lowers the donor’s adjusted gross income. This tax break does mean that the donor cannot also claim the donation as an itemized deduction on Schedule A of their tax return. Other donations to charity that don’t use IRA funds, however, can still be claimed as itemized deductions. The donation can also help meet all or part of the IRA’s required minimum distribution (RMD) and is a good choice for individuals who otherwise could not deduct all or part of their charitable donations. The charity must receive the donation by December 31 for the amount to be applied to that year’s tax return.

Use of Donor-Advised Funds

Donor-advised funds (DAF) have become increasingly popular in recent years as a convenient and advantageous way to donate to various charitable organizations. You receive the charitable deduction in the year in which you contribute a lump sum to the DAF, yet can hold off on distributing the funds to charities until future years. For a charitably minded individual who hasn’t decided where they want the money to go, a DAF could make a lot of sense. While you’re deciding which charities to support, your donation can potentially grow based on your investment choices, making available even more funds for charitable giving. In addition, contributing assets other than cash is simpler with a donor-advised fund. Donor-advised funds are offered by most major brokerage houses and custodians, as well as, community foundations.

Recommendation

It is not too late to elect charitable giving strategies that can provide you a tax benefit in 2019. Please contact your Marcum tax advisor to discuss how this planning may affect you.