The Planner's Perspective: Making The Charitable Deduction CountSubmitted by US Wealth Management New Haven on May 15th, 2018
By Paul Morrone CFP®, CPA, MSA
It’s no surprise that the not-for-profit sector was resistant to some of the tax code changes as many donors may receive little, if any, tax benefit for their generosity in the upcoming years. While deductions for contributions are not generally the only motivation for individuals to bequeath some of their wealth to an organization with good stewardship, it certainly makes giving more attractive from a dollars and cents perspective.
The fact is, considering the cap on the state and local income tax deduction is set at a measly $10,000, married taxpayers with no healthcare expenses or mortgage interest will likely be taking the standard deduction of $24,000 in 2018. Even high earning families with 7 and 8 figure incomes may not have enough allowable deductions to itemize under the new rules. That is, of course, unless they are extremely charitable each year. With the married filing jointly (MFJ) standard deduction increased to $24,000, a couple with no healthcare or mortgage interest deduction would need to donate $14,000 annually in order to even benefit from $1 in the form of an itemized deduction (and that’s assuming they have at least $10,000 in state and local tax deductions).
To combat this, charitably inclined individuals are turning to alternative strategies that will allow them to continue with their philanthropic endeavors while also generating federal income tax deductions. Grouping donations in one tax year is arguably the simplest way to generate an allowable deduction. If you previously gave $10k away each year, it may be wise to consider making a $20k donation every other year as to derive some tax benefit from gifts you intend to make (again, assuming you have state and local taxes of at least $10k). While this may be challenging from a cash-flow standpoint, timing contributions in this manner will allow a donor to continue with their gifting plan over the long-term but derive some personal financial (tax) benefit in the short-term. This methodology may also be prudent if you anticipate a large one-time transaction (business sale, property liquidation, etc.) to occur in one year that may materially affect your income level and marginal tax bracket.
Higher net-worth individuals may want to consider advanced philanthropic giving strategies involving charitable trusts or donor advised funds. Without getting too technical, taxpayers may be able to make one large gift, realize the tax benefit in a specific tax year (subject to AGI limitations), and leave a legacy to a charity (or charities) of their choice for years to come. A charitable gift of this nature takes planning and often is not as simple as writing a check, however, the benefits to both the donor and the organization set to benefit from the funds can be well worth the cost. While donations are frequently in cash, gifting securities or other highly appreciated assets may provide an additional tax benefit that reduces or eliminates capital gains tax upon liquidation of the assets once they have been transferred to a donor advised fund or charitable trust. This means that an individual won’t incur a personal tax liability upon liquidation and realization of a capital gain of a highly appreciated asset transferred to a charitable trust or donor advised fund.
Tax consequences aside, we always recommend vetting charities to make sure that any donations made are used for the intended cause in the most efficient way possible.
Content in this material is for general information only and is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.