In my previous blog post, I discussed ways to plan ahead for your 2019 taxes based on the new tax laws. Now, I’d like to talk about one aspect that the Tax Cuts and Jobs Act (TCJA) of 2017 didn’t really change but was indirectly impacted: How charitable contributions are treated.
Americans are generous. Statistics show 96% of us give either monetary gifts; goods, like food and clothing; or time to charities.* While tax breaks are 1 reason people give, in general I find that investors are more focused on using the lessons of giving to pass on to their kids their charitable legacy and illustrate the purpose of their family.
As you can imagine, as a tax practitioner, my 3 children understand “tax” as a concept from an early age. But they’re also aware of the value of giving their time and part of their allowance to charity.
Having said that, I’ll focus this post on the tax considerations of giving.
Giving cash vs. donating appreciated shares
Donating cash to a charity is easy. But it’s often much better to donate appreciated securities to charities, either directly, through donor-advised funds (DAFs), or through a foundation.
Giving appreciated stock you held for more than 1 year helps both your favorite charities and yourself. In addition to your charitable deduction on the value of your gift, you wouldn’t pay the capital gains tax on the appreciation of the securities, maximizing your gift. It’s a better bang for your buck.
Take hypothetical married couple, Jack and Jill Golucki, for example. The Goluckis want to donate $10,000 to their favorite public charity. They happen to own a stock fund worth $10,000 with a $2,000 cost basis.
As the table below shows, if they sell the fund and contribute the proceeds, they’ll pay $2,000 in capital gains taxes (ignoring Medicare Surtax and state taxes). But if they contribute the fund in kind to the charity, they’ll pay no taxes on the appreciation and receive a charity deduction (a twofer.)
|Example 1: Donating cash vs. appreciated securities||Sell the fund & contribute the proceeds||Contribute the fund directly to a charity|
|Capital gains taxes||($2,000)||$0|
|Total gift to charity||$10,000||$10,000|
(Estimates are rounded to nearest $1K.)
The Goluckis can now reinvest their cash on hand in their portfolio, maintaining and rebalancing their asset allocation in a tax-smart way.
Takeaway: The charity receives the same amount, but you maximize your benefit by receiving a tax deduction without paying federal or state income tax on the sale of securities.
So, if you have a concentrated position, your portfolio has appreciated significantly, or 2019 is a high income tax year because of the sale of a business, etc., giving appreciated shares can complement and enhance your financial plan—all while supporting your favorite charities. It’s a win-win.
Tools within your charitable toolkit
Now that the standard deduction for married couples filing jointly is $24,400 for 2019 and deductions for state and local taxes (SALT) are capped at $10,000, some investors may not donate enough to charities to make itemizing an option. If this applies to your situation, here are few considerations to take into account.
Strategies for giving before you reach RMD age
If the Goluckis haven’t reached age 70½, the age they’d have to start taking required minimum distributions (RMDs), and have paid off their mortgage, the $24,400 standard deduction may be a high hurdle to clear.
One way some investors have reacted to the new standard deduction is by “bunching” 2 or 3 years’ worth of charitable gifts into 1 year. So, for example, if the Goluckis wish to donate $10,000 annually to charities, they could consider making a $30,000 donation in 2019, then donating nothing and taking the standard deduction in 2020 and 2021.
|Example 2: Deduction with “bunched” giving for Jack & Jill Golucki (pre-retiree couple)||Amounts in 2019||Amounts in 2020 & 2021|
|Adjusted gross income (AGI)||$150,000||$150,000|
|Mortgage interest||$0 (paid off)||$0 (paid off)|
|Higher of standard or itemized deduction||$40,000||$24,400|
|Federal income tax (rounded to nearest $1K)||$16,000||$19,000|
Takeaway: Without bunching, the Goluckis don’t receive a charitable deduction for their annual $10K donation. Many individuals considering the “bunching” strategy can look at DAFs. These funds allow the taxpayer to receive the charitable tax deduction in the year of donation, while granting desired amounts annually from the DAF to their favorite charities to maintain the charities’ annual funding needs. Many small charities are worried that the current tax rules may impact their funding from donors, but recent statistics show an increase in popularity in DAFs to help those charities maintain their needed funding to support their missions.** So, help yourself and continue to do it in a way that benefits the charity.
Strategies for giving after you reach RMD age
Once Jack and Jill reach RMD age, they have another option for their charitable giving called a qualified charitable distribution (QCD).
QCDs got even better under TCJA. Any amount contributed to a qualified charity via a QCD satisfies the investor’s RMD and doesn’t count as taxable income, up to $100,000 annually. Even taxpayers who don’t itemize their deductions get the full benefit for the contribution as well as the higher standard deduction of $27,000 in 2019 (if both spouses are 65 years old).
|Example 3: Jack & Jill Golucki (RMD-age couple)||No charitable donations||$30K donation in appreciated securities||$30K donation in QCD|
|AGI, including RMD||$200,000||$200,000||$170,000|
|Higher of standard or itemized deduction||$27,000||$40,000||$27,000|
|Federal income tax (rounded to nearest $1K)||$30,000||$27,000||$23,000|
Two other benefits of making a QCD include: 1) A smaller portion of your Social Security benefit may be taxable, and 2) Your Medicare parts B&D premiums in 2 years may be lower by an estimated $1,500 because of your reduced AGI.† In other words, QCDs can reduce the impact of a “tax torpedo.” Consider working with your financial and tax advisors to determine whether it’s better to use the QCDs or give appreciated securities.
Simplifying the giving process
Start by identifying your goal and the causes you wish to support personally and as a family. Next, consider the way you gift, whether it’s in cash, appreciated securities, QCDs, or a combination of; which charities you support (public charities or foundations); and whether you’ll give directly or through DAFs or foundations. Then, understand how the tax rules may impact your plan, so you can maximize and time your gift accordingly. Last, don’t wait until the end of December to make your gift. Many charities receive most of their donations in December, but you should be proactive and coordinate your giving with your financial plan.
And don’t forget, IRS Tax Tip 2017-32 reminds taxpayers to keep good documentation including statements from the charities supporting the contributions. The IRS can negate your deduction if you’re audited and cannot prove the value of your contributions.
If this seems overwhelming, please work with a tax advisor you trust who can help you through your personal situation. At Vanguard, you can also sign up for Vanguard Personal Advisor Services® to work with our advisors. Whichever road you take, feel good because you’re donating to a cause you care about, all while benefiting yourself and your family.
*Source: Bankrate.com 2017 survey. https://www.bankrate.com/pdfs/pr/20171128-Giving-Tuesday-Survey.pdf
**Source: National Philanthropic Trust 2018 DAF report. https://www.nptrust.org/reports/daf-report/#introduction
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