The Tax Cuts and Jobs Act turned conventional planning wisdom on its head, thanks to the substantial increase in the standard deduction and changes to allowable itemized deductions. In the wake of tax reform, individuals and pass-through business owners are looking for ways to maximize the benefits of remaining itemized deductions, including the charitable contribution.
While people will likely continue to support valued causes or charities because they care, there is no denying that the tax deduction for charitable contributions has been a reliable and flexible way for individuals to combine philanthropic and personal financial impact.
In the post-tax reform landscape, however, it is critical that donors consider the ideal timing and methods of donation in order to claim maximum tax savings. Below are some of the strategies RKL advisors are discussing with clients, in the context of their own unique financial circumstances.
Time charitable deductions with bunching method
Timing is key with the bunching method, in which charitable contributions are prepaid on an alternating of every few years basis. By bunching deductions, the taxpayer can itemize deductions in the year contributions are made and use the standard deduction in years featuring little or no donations. Future donations are repeated according to the established timetable.
Streamline charitable giving with Donor Advised Funds
Taxpayers may also wish to consider using a Donor Advised Fund (DAF) to streamline giving. DAFs may be used in tandem with the bunching method described above. Here’s how it works: a taxpayer funds a DAF in year one with a large donation and claims the itemized deduction. In the subsequent years, the taxpayer directs the amounts and timing of distributions from the DAF to favorite charities and takes the standard deduction. Timing plays a major role with this vehicle, so be sure to develop a plan with your tax or wealth management advisor to execute donations to DAFs in years with larger projected tax liabilities. This provides tax savings at times when marginal tax rates may be higher.
Donate appreciated assets to enhance tax savings
Donating appreciated assets, such as common stocks, mutual funds or ETFs, can further enhance the tax savings by shifting the unrealized capital gain to a charity or DAF with no tax liability on the sale of those securities.
Make a Qualified Charitable Distribution from IRA
For taxpayers over age 70 ½, making a Qualified Charitable Distribution (QCD) from their Individual Retirement Accounts (IRA) has two benefits: it supports a cause important to them and counts toward their IRA annual Required Minimum Distribution. Keep in mind that the maximum annual QCD limit is $100,000 and this method is not permitted to fund DAFs, private foundations or split-interest charitable trusts.
As with all financial planning decisions, the methods outlined above must be considered within the context of individual circumstances. At RKL, our collaborative and customized approach to planning means we’re focused on your unique goals. Contact your RKL advisor or the team at RKL Wealth Management to explore how these and other tax-advantaged strategies can benefit you.