By Christina H. Snyder*, CISP™, RICP® CFP®
As a new year and tax season is upon us, it’s important for donors to review how their philanthropic objectives can be incorporated into their overall financial plan, and understand how their income, taxes and retirement would be impacted positively by maximizing certain planning techniques. This article will share three ideas that donors can implement to meet their charitable objectives within the framework of the new tax law. By now, everyone is aware that the standard deduction has doubled from $12,000 to $24,400 (for married couples filing jointly), as well as the $10,000 cap on state and local real property tax deductions. This may cause many Americans to opt for the higher standard deduction, but as the following giving strategies indicate, that may not necessarily be the best approach in the context of charitable giving.
First, a good place to start is by reviewing the charitable gifts that were made in 2018. Did the amount exceed the standard deduction and was it made in cash? If donors have financial flexibility, they could pick a target year and prefund several years’ worth of their intended charitable giving. With this strategy, it would be best to use a donor advised fund, which would serve as the receptacle for several years of donations, while enable the donor to take a deduction for the entire amount in the single year of contribution. The result would be that the donor would be able to itemize his or her deductions in the target year, and in the off years the donor would be using the standard deduction, but the gifts would still be made to charities from the donor advised fund. This strategy is a win-win for everyone, as it not only creates a better tax result for donors, but can also result in a larger gift to charity because of the investment and tax-free growth of the monies in the donor advised fund. However, it’s important for a donor who utilizes this strategy to notify the charity that the larger gift is for a specific time frame so the charity can plan appropriately.
Another viable strategy continues to be the donation of appreciated assets. Although it may be easier to write a check to the charity, donation of specific assets rather than cash may enable individuals to make a larger charitable impact. As we know, wealth is held in many forms, such as real estate, privately held securities, artwork, etc. Using appreciated assets for gifting, the donor can obtain two tax benefits rather than one. If the asset was owned for more than one year, the donor would avoid paying capital gains on the appreciation built into the asset and claim a charitable deduction for the full value of the asset. Additionally, if the donor wants to continue to own the stock, he or she could still donate the stock to charity, and then repurchase the shares of the same stock with the cash that would have been donated to the charity. In doing so, the donor not only receives the aforementioned tax benefits, but continues to own a favored stock with a new income tax cost basis.
If the donor is 70 ½ or older, giving money directly to a charity from an IRA continues to be an excellent strategy. The amount donated is treated as part of the donor’s Required Minimum Distribution (RMD), but is not counted as income to the donor. From an income tax standpoint, it may be better to have lower income with no deduction for the charitable gift than to have higher income with a deduction for a donation made from nonqualified funds. The reason for this is that the larger RMD may increase donors’ adjusted gross income that may cause certain tax breaks to be lost or reduced. For example, the increased income may cause the donor to be subject to the Medicare premium surtax, the alternative minimum tax, the 3.8% surtax on net investment income, as well as increase the amount of Social Security benefits subject to tax.
These charitable planning ideas are reminders of options donors can utilize to meet their specific objectives despite significant changes in the tax laws. It is always best, of course, for donors to work closely with their advisory team. Accountants, financial planners, attorneys and planned giving officers each have unique perspectives and experiences to contribute, and integrating them ensures accomplishment of the donors’ philanthropic and financial objectives.
*Registered Representative of and securities and investment advisory services offered through Hornor, Townsend & Kent, LLC. (HTK). Registered Investment Advisor, Member FINRA/SIPC. 4 North Park Drive, Suite 400, Hunt Valley, MD 21030. 410.821.2920. AspireWealth Planners and other listed entities are unaffiliated with HTK. HTK does not provide legal and tax advice. Always consult a qualified tax advisor regarding your personal tax situation and a qualified legal professional for your personal estate planning situation. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. 2484285AL_APR21