Giving to Charities – These are Tax Savings Strategies You Don’t Want to Miss
Are you giving as tax efficiently as you can? The New Tax Act makes it more important to be tax smart about how you are gifting.
As you probably know in 2017 the standard deduction was $6,350 for individuals and $12,700 for married couples. However, as a result of the Tax Cuts and Jobs Act (TCJA) the standard deduction almost doubled to $12,000 for individuals and $24,000 for married couples. This means that for many of you will now be better off taking the standard deduction rather than itemizing deductions. Those of you who have been itemizing charitable contributions in the past will no longer get that immediate deduction.
However, there are strategies that be very advantageous to lower your tax bill. What should you consider?
Bunching is good!!
Bunching your giving makes a ton of sense for those giving more than $10,000-$20,000 annually because it allows you to bunch or lump two or more years of charitable giving into a single tax year. For example, if you were going to make a $24,000 contribution to your favorite charities this year and next year, you could consider “bunching” your contributions into a single year, and then itemize your deductions in the year you make the contributions. This would get you above the standard deduction of $24,000 and allow you to receive some tax savings. Below you’ll find a few different methods to consider if you want to start bunching your giving.
- Gift Directly to Charities in the chosen year – This is easy and gives the charity an immediate benefit, but it doesn’t allow you to give over multiple years.
- Gift into a Donor Advised Fund – We like this a lot, and find our clients do to!
This allows you to take advantage of bunching in a different way. With a Donor Advised Fund (DAF), you can gift multiple years into one year’s worth of gifts into the fund, and then disperse gifts over a period of years. Our clients love this option because it is more efficient, and they can easily logon to their personal DAF portal to do their gifting. If they are going out to a charitable event, they can let them know the pledge, come home and make their contribution!
Another piece to keep in mind with bunching is that donating appreciated securities most always makes the most sense. When donating stocks, bonds, or mutual funds to a charity, the donor typically takes the deduction for the full market value of the item. You also don’t need to pay any capital gains tax, like you would if you first sold the stocks and then donated them.
Qualified Charitable Distributions – Special Strategy for Age 70 ½
You might not always want to bunch or be desire to give in a single year. Do you have any other options?
If you are over 70 ½ the answer is yes! You can make what is known as a Qualified Charitable Distribution. Every year over age 70 ½ you can gift up to $100,000 directly from your IRA to your chosen charities. This satisfies the RMD, but the deduction is not included in taxable income on your tax return.
By excluding the QCD income from your income, you can receive a greater tax benefit than even if you had received a deduction. This is because it allows you to reduce your adjusted gross income, which results in lower tax. This strategy can make a lot of sense if you are over 70 ½, aren’t doing bunching, and give to charities. We find our clients really like this option because it allows them to continue doing the giving they desire, but also be smart on their taxes.
Please let us know if you have any questions about how this might make sense for you. While it may seem complicated at first, it can be an easy process that saves you on taxes and allows you to continue giving to those charities you believe in.
Kerry Meath-Sinkin, CFP®AIF®, is a financial planner based in Minneapolis. She graduated with honors from Brown, and works with clients not only in the Twin Cities, but nationwide. Kerry believes in a holistic approach to finance. She works with her clients to develop a practical plan with their finances, while also working on their inner relationship with money. Together, these aspects allow clients to feel healthy, abundant, and free. Kerry also has a passion for healthy living, is a certified Ayurvedic practitioner, and public health educator. Click here to learn more about Kerry
This piece is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.