The Tax Cuts and Jobs Act (TCJA) made many changes to the Tax Code, including increasing the standard deduction to $12,000 for a single taxpayer and to $24,000 for a married couple filing jointly. It also raised the capital gains rate. The result is that fewer taxpayers will itemize their deductions. Taxpayers who do continue to itemize, generally high-net worth individuals, can continue to deduct their charitable contributions. This is a good thing for nonprofit organizations. The key to maximizing the benefit of their charitable deduction is good planning.
Donating Cash Sometimes Makes Good Tax Sense
Often, taxpayers make cash contributions to their favorite nonprofit. This may still be the best choice for some taxpayers. For example, a taxpayer who plans to contribute depreciated stock may find it more beneficial to sell that stock and contribute the proceeds. That way, the taxpayer can recognize the loss on the sale and get a charitable deduction. Taxwise, this makes good sense.
Donating cash also may make sense if the donor “bunches” the gift. This means taking advantage of the standard deduction some years and taking itemized deductions other years. For instance, suppose an individual pledges to donate $10,000 per year for five years to their favorite nonprofit. The higher standard deduction may mean that it would be more advantageous for the taxpayer to restructure their donation. It may offer a greater tax advantage to the individual to deduct $25,000 two of those five years.
Donating Appreciated Stock
There are, however, other charitable techniques. By contributing appreciated stock — rather than cash — to the nonprofit of their choice, high-net-worth taxpayers can benefit a cause they believe in and minimize their taxes. That’s because the TCJA allows donors of appreciated stock that has been held for more than one year to claim an income tax charitable deduction equal to the stock’s fair market value on the date of the donation, up to 30 percent of the donor’s adjusted gross income. As an added incentive to structuring contributions in this way, there is no capital gains tax on gifts of appreciated property to charity. The charity can sell the stock for full value without recognition of capital gains tax.
Donors of this appreciated stock can take a deduction equal to the fair market value of the stock at the time of the donation, reduced by the amount of the ordinary income that would have resulted had the contributed stock been sold. (Essentially, the donor’s income tax basis in the stock.) Unused deductions can be carried forward for up to five years from the date of the donation.
Contributions of appreciated stock can be structured in a number of sophisticated ways, including through a charitable remainder trust or a “charitable swap.”
Whether you itemize your deductions or take the standard deduction, it makes sense to explore your options before making a sizeable charitable contribution.
Contact a Not-for-Profit MCB 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.