There has been much ado on the potential impact of tax reform on charitable giving lately! While there is still much conjecture, I’m pleased to report that there are a couple of strategies that proactive donors should be considering this year.
As a reminder, there were four significant changes to the tax code that may affect your charitable giving and charitable tax planning for 2018: 1) the limit on gifts of cash has been raised from 50% of adjusted gross income (AGI) to 60% of AGI; 2) the standard deduction has been doubled to $12,000 for individuals and $24,000 for couples; 3) the estate tax exemption has also been doubled from approximately $5.5 million per individual to $11.18 million; and 4) the tax rates have been lowered for individuals and corporations. The net effect of all of these changes is that you are free to give 10% more of your AGI to charity, but with the higher standard deduction, lower tax rates and a higher estate tax threshold, the overall tax incentives for charitable giving have been lowered.
One of the tools that is being widely recommended for eligible taxpayers is using an IRA Charitable Rollover, which allows an individual (age 70 ½ or older) to make a direct distribution from their IRA to their favorite charity. By working with your IRA administrator and making the distribution directly to the organization, the distribution is not counted as taxable income to the donor, but it does count towards the donor’s required minimum distributions. The IRA Charitable Rollover has been available since 2006, but it was renewed every couple of years and was often uncertain until very late in the year, making it difficult to use as a planning strategy. All of that changed when the provision was made permanent in 2015.
Another strategy identified by various professionals is known as “stacking”, “bunching”, “lumping” or “clumping,” and may be a very useful method to maximize charitable giving. “Stacking” involves making more than one year’s worth of payments or charitable gifts in a single year so you can exceed the threshold to itemize your deductions. For example, you may choose to pay two year’s-worth of property taxes, mortgage interest and charitable gifts in late 2018 for both 2018 and 2019. The intended result would be to take the itemized deduction in 2018 followed by taking the standard deduction for 2019. This strategy requires planning so you have sufficient cash or other assets to make such gifts in a single year.
“Stacking” may have a unique unintended negative consequence which can also be overcome with good planning. It is not likely that your mortgage company or the local tax office will care if you pay your property taxes or mortgage interest in advance, but a local charity might run into a problem if all their major donors gave big in one year then gave nothing the next year. A simple solution is to open a donor-advised fund to make your biennial or triennial charitable contributions, as well as for your normal annual grants to your favorite charities. Your donor-advised fund has the opportunity to earn income tax-free while it is waiting to be distributed, so you could end up giving away more than you first put in the fund. East Texas Communities Foundation currently manages over 100 donor-advised funds and would welcome the opportunity to help you set one up to make your giving as efficient and effective as possible. If you prefer not to use a donor-advised fund, but still want to employ the stacking strategy, let me encourage you to communicate your intentions to your favorite charities so they can plan for the fluctuations in income. Please don’t assume you’re the only one making this change and that it won’t affect them.
The good news is that despite major tax reform that could reduce the tax incentives for charitable giving, most donors consider many other reasons for giving as much higher priorities than tax consequences. For tax conscious philanthropists, using your IRA to make charitable gifts or using a donor-advised fund to “stack” gifts may be your next best opportunity to give well.