Hot Issues in Charitable Gift PlanningSubmitted by Bellwether Wealth on May 31st, 2018
by Guest Blogger: Paula J Metcalf, General Counsel and VP for Gift Planning, Lincoln Community Foundation
With the passage of a new tax bill in December of 2017, the landscape has shifted a bit when it comes to planning for income tax deductions and charitable giving. The biggest change for many people comes from the new larger standard deduction.
The individual standard deduction has increased from $6350 per person to $12,000. Taxpayers over 65 receive an additional standard deduction of $1300 per person for each married person or $1600 for a single person. Therefore, a couple over 65 will now only itemize if their total deductions exceed $26,600. This will simplify the tax filing process for many but some fear that it will also have an adverse effect on the nation's charitable organizations.
Experts predict that the percentage of taxpayers who itemize will now decrease significantly from approximately 28% to less than 10%. And national philanthropic organizations predict that total giving will therefore decrease because fewer donors will receive a tax benefit for making their contributions. The total decrease for 2018 is projected as anywhere from $11 to $22 billion dollars.
If you are charitable and find that you will no longer be claiming itemized deductions, how can you receive the best tax benefit for your contributions? Two major strategies should be kept in mind:
1. BUNCHING OF DEDUCTIONS. Taxpayers may plan the timing of their charitable gifts to fall intoyears when they can itemize.
For example, Joe and Mary, age 52, usually donate $25,000 per year. If they make zero contributions in 2018 and take the standard deduction of $24,000, and then make $50,000 in charitable gifts in 2019, they could save over $3000 in federal taxes over the two-year period.
The availability and amount of any savings will vary, though, so anyone considering this strategy of bunching should discuss their specific situation with a tax advisor. For donors who would benefit tax-wise from bunching their deductions, they can maintain the same giving schedule for their favorite charities by opening a donor advised fund. The contribution can be made to this personal charitable fund maintained at a public charity (like a community foundation or charitable affiliate of an investment firm) when the taxpayers want to capture the deduction. Grants can then be made from the donor advised fund to the various charitable organizations at the same times when the taxpayers would otherwise have made their gifts to the charities.
2. QUALIFIED CHARITABLE DISTRIBUTION FROM IRA. A special tax benefit is available for taxpayersover the age of 70 and ½ who are required to draw a required minimum distribution (RMD) from their standard individual retirement account. The tax code allows such a taxpayer to direct hisIRA administrator to send a distribution directly to a qualifying public charity (like a church,college or other nonprofit), and the amount will count against the taxpayers RMD without beingincluded in the taxpayers' taxable income. There is a $100,000 cap on the amount that can be transferred from an IRA annually and qualify for this qualified charitable distribution (QCD)treatment.
For example, Tony advises his IRA administrator to transfer $15,000 from Tony's IRA to his church. This satisfies Tony's RMD and is not added to Tony's other income of $88,000. Tony and his wife, Sarah, will not itemize and can claim the full standard deduction of $26,600. Compare: If Tony had taken his RMD directly, the $15,000 would have added to their income, meaning they would be taxed on $104,000 of income rather than $88,000. Their deduction of $26,600 would have remained the same because they would not benefit from claiming the $15,000 itemized deduction.
This QCD technique (also sometimes called a "charitable IRA rollover") is of most benefit to those taxpayers who will no longer itemize. But, because a distribution from an IRA directly to charity does not get added to the taxpayer's gross income, it can also create benefits for taxpayers who do itemize (such as reducing the amount of social security income that is subject to tax or reducing the extra medicare tax liability). Again, it is important for taxpayers to consult with their advisors to determine whether the direct IRA payment could be advantageous for them.
We know that many who are charitably inclined will continue their past giving patterns regardless of tax consequences. But it never hurts to plan wisely to generate the best tax consequence, too.
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