Stack Up Charitable Giving for More Tax Impact
February 27, 2019
Charitable giving and its associated tax benefits will be a more complicated proposition in 2018 and beyond, thanks to the enactment of the 2017 Tax Cuts and Jobs Act (TCJA). But with proper planning, many taxpayers will be able to continue to support their favorite philanthropic causes while reducing their tax bills.
Two related techniques—charitable “clumping” and the use of donor-advised funds—may gain traction as methods taxpayers can use to keep giving while maximizing tax breaks under the new law. More on that in a moment.
First, some background: How important is charitable giving? And how specifically does the change to the tax law affect it?
In all, US charities received a record $410 billion in 2017 with givingusa.org/giving-usa-2018-americans-gave-410-02-billion-to-charity-in-2017-crossing-the-400-billion-mark-for-the-first-time/. The 30% of households that itemize their taxes made 82% of charitable donations and their gifts averaged $4,978 in 2015, the latest year for which comprehensive IRS data is available. An eye-popping 38% of Maryland taxpayers donate to charity, placing the state first in the nation for that category, and the second most charitable state in the nation (overall), according to WalletHub.
What changed is that the tax law nearly doubled the standard deduction for individuals and families. As a result, concern is mounting that donations could plunge in 2018 by as much as $20 billion.
Wait. Doesn’t a more generous standard deduction mean fewer Americans will have to go through the hassle of itemizing? Isn’t more money in their pockets at tax time a good thing? Yes, probably so.
But it also means fewer people will itemize their taxes in 2018 and beyond. And since 12% of all donation checks are written in the last three days of the year, according to Charity Navigator, the concern is that less itemizing could hurt nonprofits in the long run. Also, while average donations are nearly $5,000, median donations are much lower. According to Blackbaud Institute, the median charitable gift made in 2017 below the $1,000 level was $20. The median donation above $1,000 was $2,000. Lots of little donations could vanish if taxpayers are thinking about deductibility.
Fortunately, there is an alternative for taxpayers who are fundamentally committed to philanthropy. Affluent taxpayers can use charitable clumping as a financial planning tool to push their itemized deductions above the standard deduction, which has been set at $12,000 for individuals and $24,000 for joint filers.
The way clumping works is this: A taxpayer earmarks several years of contributions and donates them in a single year. For example, a contribution of $50,000 made every five years instead of five one-year contributions of $10,000 is more than enough to ensure that the taxpayer could itemize and deduct the full $50,000 in the year donated.
Donor-advised funds have existed for years and are useful to structure a clumping strategy, with taxpayers using cash or appreciated securities to fund the contribution. These funds can be started with as little as $5,000. Contributions can be made as often as the donor likes, and grants are disbursed when the donor is ready. Meanwhile, tax benefits are received immediately, and donated assets grow tax-free.
There are some drawbacks. Contributions to a donor-advised fund are irrevocable and assets are needed up-front to fund the contribution. But for affluent givers who have traditionally itemized, using a donor-advised fund to “clump” donations can be an effective method to keep giving while reaping tax benefits. Taxpayers should seek financial advice to decide the best charitable gifting strategy for them.
Our belief is that creative and committed taxpayers will be looking for ways to not only continue giving but to expand their philanthropy as their wealth grows.
Let the Certified Financial Planner® professionals at Williams Asset Management help with your wealth management needs. Whether you need comprehensive and holistic financial planning or investment management, we can help! We are fee-based, independent financial advisors located in Columbia, the heart of Howard County, Maryland. Schedule your complimentary consultation today by calling (410) 740-0220!
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