Making Your Charitable Gifting More ImpactfulSubmitted by Mustard Seed Wealth Management on January 10th, 2020
With the advent of the Tax Cuts and Jobs Act Tax Reform law at the end of 2017, many changes came that may affect charitable gifting. Here are a few strategies that may benefit certain givers in different situations. The main people that can benefit from this strategy are: those who have itemized deductions that are very close to the standard deduction; people with appreciated assets; retirees who are in Required Minimum Distribution status; and those who are thinking about how they might leave a legacy in their estate in the most tax efficient way.
The first strategy that we will discuss is the Deduction Lumping Strategy and using Donor Advised Funds (DAF). Because of the new tax law, the standard deduction for 2020 has been increased to $24,800 for married couples filing jointly ($12,400 for single filers, and $18,650 for heads of household). Most taxpayers take the standard deduction, but for some taxpayers there is an opportunity. The most common tax deductions are the state and local tax deductions (which is now capped at $10,000), the mortgage interest deduction, and of course your charitable gifts. You can't control much about the first two (they are what they are) but you can control how much you give to charities in a given year. For this reason, it may make sense to give more than one year's worth of giving in year 1 and then take the standard deduction in year 2 and repeat this process as long as the tax laws are the way they are. A helpful tool in this strategy is the Donor Advised Fund. The way these accounts work is that you give the money to the account and then it stays there until you direct the custodian of the account to grant the money out. So assume you are married and normally give $10,000 per year to charity and you wanted to implement this strategy. If you have $8,000 in state and local taxes, $6,000 in mortgage interest, and you give $10,000 in charity, there is no advantage to itemizing your deductions. However, if you give $10,000 like you normally do to your charities and then give $10,000 at the end of year 1 to a DAF and then distribute the money to the charities that you normally give to in year 2, then you could have itemized deductions of $20,000, $8,000 and $6,000 in year one which is $34,000. Depending on your tax bracket, this strategy could save you $2-$3,000 each year you deduction lump. Another thing to be aware of is the ability to give appreciated assets to your DAF. The benefit of this is that if you have held these assets for more than a year, you get to deduct the fair market value as of the date of transfer and you recognize no gains.
The second strategy is to use Qualified Charitable Distributions (QCD) for those in Required Minimum Distribution (RMD) status with an IRA. If you are over age 70.5 (or 72 if this is 2020 or later) you are required to distribute a certain amount from your regular IRA. The IRS allows you to distribute up to this amount directly to charities and the money never goes into your income. This is a fantastic way to reduce your tax liability without having to itemize the deduction. A few things to be aware of if you want to do this:
1. The money has to go directly to the charity, so you can't take it personally and then give it to the charity.
2. The first money that comes out of your IRA is what satisfies your RMD. So you cannot recharacterize your RMD as a QCD once you have taken money out directly. The QCD limit is $100,000 per year.
3. You cannot contribute your RMD to your Donor Advised Fund, it must go directly to a charity.
As an example assume you are age 73 and your RMD is $15,000, which is the amount you normally give to charity. If you are married, your mortgage is paid off, and you pay little in state and local taxes, you would likely not benefit from a tax standpoint for writing a check to a charity. If you direct your IRA custodian to give the money directly to your charity however, the money never hits your tax return and you save the amount in taxes you would have paid at your marginal bracket, both federal and state.
The final strategy is to consider leaving some or all of your regular IRA to charities in your estate plan. If you are at the stage of your life where estate planning is on your mind and you are debating about what to leave to your charities, the best option would be to leave some or all of your regular IRA to charity because if you leave it to your kids or spouse they will have to pay taxes on the whole amount eventually. However, if you leave it to a charity, the charity will not have to pay any taxes on the distribution. So if you want to leave something, this would be the best option for you if you have a regular IRA (not a Roth IRA). Of course there are a lot of considerations in making this decision, and if your family and loved ones are taken care of otherwise, this could be a great option for you.
This is not tax advice. This is also not investment advice. Every situation is different and these strategies are not for everybody. You should consult with a professional tax person to ensure that these strategies make sense for you.