Charitable Giving & Taxes
Recently, you may have heard about the Iowa State football fan who received thousands of dollars in beer money after holding up a sign with his Venmo account at ESPN’s College GameDay. He was originally requesting funds because he was sadly out of Busch Light, or Busch Latte, as we fancy it up in Iowa. He ended up with more than enough for a 12-pack and ultimately decided to donate the money to the University of Iowa Children’s Hospital because he’s a solid guy like that. The media picked up on it especially when Busch Beer took notice and matched the fan’s donation. We need more feel-good stories like this one; well done, kid!
However, given the tax landscape for itemized deductions has changed post-tax reform, there have been several articles reporting a decrease in charitable donations by individuals. A study by Giving USA did notice an increase in corporate donations, and also donations from the very wealthy, but a decrease in smaller donations likely from the average taxpayer using the increased standard deduction. Makes sense, but I wish it didn’t. I’ll show you five ways charitable donations are still beneficial tax-wise, potentially even if without itemizing, and at the end I’ll tell you what I really think about the whole thing.
Charitable Giving Tax Advantages
1) Qualified Charitable Distribution (QCD) from your IRA
An otherwise taxable distribution of up to $100,000 from an IRA can be paid directly to a charity from the IRA account for individuals age 70 ½ and over. This is a win-win for the donor and qualified charity! Not only does the charitable organization get a donation, but the donor does not include this amount into income or pay tax on this distribution. So, while no charitable deduction will be taken for this amount, utilizing a QCD can lower the tax bill by keeping adjusted gross income down. This can benefit the taxation of Social Security income, decrease Medicare premiums, and help avoid the alternative minimum tax (AMT) and net investment income tax.
Another bonus is a QCD can count towards the required minimum distribution (RMD) from an IRA that individuals age 70 ½ or over must satisfy annually. Remember to make this decision to give via QCD by December 31st to get the tax benefit on that year’s return, and ensure age 70 ½ has already been met at the time of the distribution.
2) Donate Appreciated Property
Gifting appreciated assets is beneficial for taxpayers because a current year itemized deduction for the FMV of the asset is allowed, and at the same time there is no tax liability for the increase in value from original cost. Be sure to hold property such as stock for at least one year before donating, or the deduction will be limited to the basis in the property, which is generally original cost.
Make sure to obtain an independent written appraisal to attach to the tax return if the property is valued at $5,000 or more, and complete Form 8283 Noncash Charitable Contributions in its entirety if required, or the entire deduction could potentially be disallowed! There are exceptions to the appraisal requirement – donating publicly traded stock is one, and therefore tends to be the most common sizeable noncash donations. Donating property to charity has its quirks, so it’s best to review all factors before making any large property donations.
3) Donor Advised Fund (DAF)
Donor advised funds have become increasingly popular post-tax reform. It’s similar in thought to creating a Foundation, but is something that the average taxpayer can easily do without a lot of administrative burden. Basically, an account is created with a sponsoring nonprofit organization, a contribution is made, and the organization will take control of the funds by investing and managing the assets.
The donor receives a tax deduction in the year a contribution is made to the DAF, but the contribution does not have to be distributed in that year. Rather, the donor advises the sponsoring organization when and to which charitable organizations to donate to from the account over time. This is beneficial for allowing the money to grow tax-free while invested, and also gives the donor time to determine which charities should be the recipients of their donation.
The philanthropic community doesn’t completely love DAFs though, because a donor can wait as long as they like to decide where to give their funds. Naturally, organizations would rather have the money to benefit their cause sooner than later. The ability to easily contribute noncash assets to DAFs is attractive though, as smaller organizations aren’t always able to handle complex transactions. So this ideally opens a door to bring donors and charities together.
4) Deduction Bunching
Not a new strategy, but bunching itemized deductions has become a go-to move in the post-tax reform era. It’s just as it sounds; instead of giving smaller amounts year over year, lump two or more years’ worth of donations into one year to get over the standard deduction threshold when it may otherwise not have been surpassed. This allows a tax benefit for the donation, whereas if total itemized deductions stay below the standard deduction theoretically there was no tax benefit.
Remember though, states have their own rules and thresholds. So, even in years there is no proactive donation bunching for Federal tax planning, make sure to track the amount given because it may in fact help exceed the state standard deduction, if there is one.
5) Charitable Trusts
Charitable trusts are a great tax planning tool, generally used by the wealthier folks out there because they can be more complex than the other strategies mentioned. Contributions to a charitable trust give a partial charitable donation deduction for the donor, income stream from donated assets for donor or stated beneficiaries, and help in escaping future potential estate taxes as well. Donating appreciated property to a charitable trust is a smart move often made.
A charitable remainder trust is a commonly used charitable trust. Assets are transferred into the trust, and the type of charitable trust and its terms will determine the annual income to the donor. At the end of the specified time period, assets will then transfer to the charity.
Hopefully use of those strategies will boost charitable giving back up and give tax advantages to those who thought they no longer were eligible!
But if I'm being honest, what I really think is that I wish charitable giving weren’t so mentally tied to tax reduction. I appreciate the fact there is a favorable relationship between the two that does encourage generous giving, but helping other people or animals or whatever it is you’re into is the real win, and hopefully the ultimate goal behind the donation. It is one of the most important things you can do in this life, so please consider donating your time and/or money regardless of how it affects your tax bill! And remember, “You can always give something, even if it is only kindness.” – Anne Frank