Since the 2017 Tax Cuts and Jobs Act (TCJA) passed, much has been said about the future of charitable giving. While the TCJA left intact the deduction for charitable contributions for those who itemize their taxes, doubling of the standard deduction while limiting state income tax deduction curtailed the ability of many to deduct charitable contributions. The Tax Policy Center’s Researchers estimate that the TCJA will:
- Reduce the number of taxpayers claiming a charitable deduction by 21 million.
- Reduce charitable giving in 2018 by between $12 and $20 billion.
- Reduce the federal income tax subsidy for charitable giving from $63 billion to $42 billion.
The itemized deduction, augmented by charitable contributions based on an annual rate of giving, is a thing of the past for many. The tax deduction is an added benefit when it comes to charitable giving; the benefits of giving go much deeper than our wallets. However, there are strategies to maximize those benefits under the new Tax Act. As you plan your charitable giving for 2018 and beyond, consider a qualified distribution from your IRA (for those fortunate enough to be at least 70-1/2) or consider front-end loading multiple years of charitable giving into a single year deduction via a donor advised fund.
Qualified Charitable Distribution from an IRA
On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (the “Path Act”) which permanently extended the provision to allow individuals age 70 1/2 and older to distribute up to $100,000 to an eligible charity and exclude the distribution from taxable income – essentially an above the line deduction. Since the distribution is excluded from income, it cannot also be included as a charitable deduction on Schedule A. Regardless of whether donors itemize or not, they can benefit from this type of charitable donation. In addition, the distribution counts toward the IRA’s required minimum distribution.
If you are at least 70-1/2, regularly give to your church or other charitable organization, and no longer itemize deductions, donating directly from your IRA could have significant tax savings for you.
The Community Foundation is happy to help distribute a single distribution among multiple nonprofits via a pass through fund. Note however that the IRS does not allow IRA contributions to be made to a donor advised fund. IRA distributions can create a designated or field of interest fund.
Donor Advised Funds
Gifts of cash and appreciated securities are placed into a named charitable fund held at the Community Foundation. The donor receives a charitable deduction for their taxes in the current year and becomes an advisor for the fund with the ability to recommend distributions from the fund over time. The donor must relinquish control over the assets to the Foundation. The Foundation invests the funds based on the options contained in our investment policy and future plans for the funds. These options include individually managed funds where the current financial advisor may be retained.
Those no longer itemizing deductions due to the increased standard deduction in 2018 might consider front-end loading several years of charitable giving into a single year deduction through a donor advised fund. This will allow the donor to continue supporting his or her favorite causes on an annual basis but realize a tax benefit in the year of creation of the donor advised fund and in subsequent funding years. Creating a philanthropic financial plan where the fund is replenished every 3-5 years will allow the donor to maximize the tax benefit from charitable donations.
In addition, with the tax law changes for 2018, donors can now give up to 60% of their adjusted gross income in cash gifts to nonprofits. Gifts of securities are limited to 30% of AGI but come with additional benefits discussed below.
Gifts of Appreciated Securities
A gift of appreciated securities (stocks, bonds, etc) is a popular option because of the potential added benefits related to capital gains. Donors who give appreciated stock held for one year or more are normally able to avoid capital gains tax on the appreciated portion of the stock. Gifts of appreciated securities are eligible for a tax deduction of up to 30% of their adjusted gross income based on the average of the high and low value of the stock on the date of the gift. In addition, giving a larger gift of securities, to be used for charitable donations at the discretion of the donor, saves cash flow during the year for general operating/living expenses.
VDOE Tax Credits
Similar to the Neighborhood Assistance Program, Virginia Department of Education’s Tax Credit program provides a 65% state tax credit on top of the normal federal charitable deduction. Unlike the NAP credits, the amount of credits available in a given year has never been exhausted. TCFHR is an approved Virginia scholarship foundation, which means we can accept donations for the state’s Education Improvement Scholarships Tax Credit Program. The scholarship funds provide tuition assistance for qualified, low-income new students at non-public K-12 schools. Donors can give cash or appreciated securities but the donation must be pre-approved by the State before the donation is made. We can help with the approval process. The minimum donation is $500 and the maximum donation is $125,000. Contact Ann (firstname.lastname@example.org) in our office with questions or for more information.
 Gleckman, Howard. 21 Million Taxpayers will stop taking the Charitable Deduction Under the TCJA. January 8, 2018. http://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja