The new tax law nearly doubles the standard deduction for individuals and families, simplifying the filing process for millions of Americans, but complicating giving strategies for many who have made a habit of deducting their charitable contributions.
Indeed, an estimate from the Washington, D.C., Tax Policy Center is that the number of itemizers will drop from 46 million to 13 million. That means most taxpayers will have little tax incentive to donate cash or stock to charity, reducing giving by $13 billion to $20 billion a year.
But there are tactics that can help the donors with their tax returns while still providing charities with badly needed funds. Experts are suggesting that those on the cusp of itemization should consider giving twice as much to charities in one year — bunching up or pooling gifts — even if this means giving nothing the following year. The idea is to accumulate enough deductions to itemize and write off more than the standard deduction. You’ll beat the expanded standard amount and maximize tax savings through itemization.
Of course, this makes planning difficult for charities, as they usually think about annual budgets. Fortunately, there’s another plan of action — donor-advised funds. They act like personal charitable savings accounts or private foundations, but without all the legal and accounting costs. They’ll allow contributors to make a donation and take a tax deduction in the same year. Then, the contributors can direct their money to be paid to selected charities over time. You can set up DAF accounts at a community foundation or investment firm. You add assets whenever you want, deciding later what to donate and to which organizations.
You tell the fund’s administrator how to spend the money by selecting eligible charities and the amount to be donated. DAFs can also accept securities, and this is an excellent way to unload appreciated stocks without paying capital gains tax. When you put appreciated securities into a DAF, you get to deduct the full current value from your taxable income that year. With the stock market at record highs, many investors have portfolios full of appreciated stock they can’t sell without paying capitals gains taxes. So it can be a great opportunity to transfer appreciated stocks, mutual funds and ETFs into a donor-advised fund and get the deduction right away.
Of course, tax write-offs are not the only reason people make donations. There’s a genuine wish to do good! But it can’t be denied that there’s usually an enormous amount of giving in the last two days of a year, meaning that tax benefits definitely drive a lot of folks. By taking advantage of bunching and DAFs, you’ll allow your charitable urges to coincide with smart tax planning.
If you have questions, contact an MCB NFP Advisor at 703-218-3600 or click here. To review a summary of recent articles related to exempt organizations, click here. To learn more about MCB’s Not-for-profit practice, click here. To learn more about MCB’s tax practice and our tax experts, click here.