The recent Tax Cut and Jobs Act was the biggest overhaul of US tax legislation in decades. SageVest Wealth Management has been proactive in advising you on how the sweeping tax reforms may impact your investments and your wealth. We’ve focused on both the intended and unintended consequences to individuals, families, and businesses. Here, we provide some insights on tax reform and charitable giving, including strategies to maximize the value of your future charitable giving.
The Positives Of Tax Reform And Charitable Giving
Lower Income Taxes For Many
Changes to income tax brackets are intended to lower taxes for most individuals. For those who benefit, more disposable income may present greater opportunity for charitable giving.
Lost Or Reduced Itemized Deductions
Many itemized deductions were capped or eliminated as part of tax reform, including changes to state, local, and property taxes, and mortgage interest deductions. Potentially, taxpayers still able to claim itemized deductions may increase charitable giving to offset the loss of other itemized deductions.
Increased Cash Donations, Relative To AGI
Donors can now deduct cash contributions of up to 60% of their adjusted gross income, possibly encouraging increased cash donations.
The Negatives Of Tax Reform And Charitable Giving
Increased Standard Deduction
The standard deduction has almost doubled for both single and married couples/filing jointly tax designations. As a result, more taxpayers will now take the standard deduction. Without an itemized deduction tax benefit, this could dis-incentivize some taxpayers from charitable giving.
Example: Jack and Lisa are married. In 2017, they had itemized deductions of $22,000, comprising $10,000 of state taxes, $7,000 of mortgage interest, and $5,000 of charitable giving. Beginning in 2018, Jack and Lisa will benefit from a higher standard deduction of $24,000. However, they’ll no longer receive any tax benefit from their 2018 charitable gift of $5,000, because their itemized deductions total $22,000, less than the new standard deduction of $24,000.
Philanthropy On A Grand Scale
The wealthiest philanthropists tend to gravitate towards institutional giving to large organizations that can provide public recognition. If charitable giving becomes concentrated among higher net worth individuals, smaller charities could lose out.
Estate Tax Exemption
The doubling of the Federal estate and gift tax threshold means that fewer families have the tax incentive to give charitably as part of their legacy planning.
Tips On How To Maximize Your Charitable Giving Under The New Tax Laws
Aggregate Years Of Giving With Charitable Gift Funds
If you’ll benefit from higher standard deductions but remain charitably inclined, consider a charitable gift fund. You’ll receive an immediate tax benefit for contributions made, while retaining flexibility to distribute the assets to charitable organizations over multiple years. Concentrating several years of intended charitable gifts into your gift fund during one tax year may push your deductions higher, helping you to exceed the standard deduction amount. In subsequent years, you would resume using the standard deduction, while distributing assets from your charitable gift fund until it’s depleted.
Example: For Jack and Lisa in the example above, their itemized deductions now fall below the new standard deduction of $24,000, and they receive no tax benefit for their $5,000 charitable gifting in 2018, unless their deductions increase. However, if they contribute $25,000 to a charitable gift fund in 2018, this boosts their tax deductions $18,000 above the standard deduction as their itemized deductions total $42,000 ($10,000 of state taxes, $7,000 of mortgage interest, and $25,000 of charitable gifts). They can distribute the gift fund assets over five years, while resuming the standard deduction in the following four years. Once the charitable gift fund is depleted, they can consider a similar strategy.
Make Charitable Gifts From Your IRA, Reducing Your Taxable Income
If you’re 70 ½ or older, you can gift up to $100,000 per year directly from your IRA assets. While you won’t receive a tax deduction benefit from the charitable gift itself, it’ll reduce your Required Minimum Distribution, thus decreasing your taxable income and your tax liability.
Gifting IRA Assets vs. Funding A Charitable Gift Fund With Appreciated Securities
If you’re 70 ½ or older, you might have to choose which investment option works best: either front-loading a charitable gift fund to boost your itemized deductions, or gifting your IRA assets to reduce your taxable Required Minimum Distribution.
Every situation is unique and should be carefully evaluated with guidance from your independent financial advisor and your tax preparer. However, here are two general tips to help you and your advisors navigate the best course of action:
1. If you don’t need all of your IRA distribution, gifting part of your required distribution could be ideal.
Example: Ted’s Required Minimum Distribution is $80,000, but he only needs $50,000 to supplement his retirement income. Instead of recognizing the full $80,000 taxable IRA distribution, Ted can gift $30,000 of his RMD. This reduces his taxable income by $30,000, thus lowering his taxes, and possibly also lowering his Medicare premiums by virtue of lowering his adjusted gross income.
2. If you have significant appreciated securities, gifting them outright to a charitable organization or to a charitable gift fund might be a better strategy, as long as you gain an additional deduction for the bulk of your charitable gifts. This is due to the associated tax benefits of both reducing your current taxable income, while also averting future capital gains.
Other factors should be taken into consideration, including investment positioning, the magnitude of capital gain exposure, the likelihood of selling the investment in the future, and other tax facts, e.g., Social Security tax impacts, Medicare premium impacts, and your ability to claim medical expense deductions.
Charitable giving is a lifeline for non-profit organizations. If you would to develop a planned giving strategy that aligns your wealth with your personal and family values, relative to tax reform, investment positioning, and more, we invite you to contact us.