How to Increase Tax Benefits of Charitable Giving

One of the outcomes of the 2017 Tax Cuts and Jobs Act (TCJA) was to reduce the marginal tax benefit of giving to charity. By dramatically increasing the standard deduction to $12,950 for individuals and $25,900 for married couples, TCJA eliminated the need for many taxpayers to use Schedule A to itemize deductions, which is the only way to reduce taxable income for charitable contributions. 

If you’ve been taking the standard deduction, there are several ways you can receive tax benefits from your philanthropy. While the strategy you choose depends on your specific circumstances, here are a few ideas to consider. 

  1. Convert RMD to Qualified Charitable Deductions (This option does not require itemizing)

This is an option for seniors who take a required minimum distribution (RMD), which is the amount of money that must be withdrawn annually from an employer sponsored retirement plan or a taxable IRA once you turn 72. RMDs come from tax deferred retirement plans, so you have to pay ordinary income taxes on the withdrawal, but if you don’t need the money for living expenses you can allocate some or all of your RMD directly to charity. This type of gift is called a Qualified Charitable Distribution (QCD) and there are no taxes up to $100K, making it a great way to reduce your tax liability while expanding support for causes you care about. 

  • Gift Highly Appreciated Assets

Donating a highly appreciated asset to charity is one of the most tax-savvy ways to give. Let’s say you purchased stock for $1K that’s now worth $100K. When you go to sell the stock, you’ll owe capital gain on $99K, which represents a significant tax liability. Instead of selling the stock, when you gift it to a qualified charity you can take the entire $100K fair market value as a deduction. Gifting stock can also be a good vehicle to help you rebalance your portfolio if one of your holdings has surged in value. You can let the capital gain fund your philanthropy while you take the deduction. This deduction is limited to 30% of adjusted gross income.

  • Create Donor Advised Fund

Donor advised funds (DAF) have gained in popularity as a convenient way to claim larger tax benefits. When you set up a DAF, you receive an immediate tax deduction. A sponsoring organization or non-profit manages the account, but as the donor, you can direct how to invest the assets, and decide when charitable contributions will be dispersed, as well as which charities receive contributions.

DAF Scenario: 

Let’s say that your itemized deductions only add up to $11K, so in past years you’ve opted to take the standard deduction for a couple of $25,900. This year you have some windfalls that change your tax situation. Stock you own appreciated by $50K, plus your employer gave you a sizeable bonus. Now you owe capital gains on the stock and the bonus has bumped you up from the 24% tax bracket into the 32% bracket.  Instead of paying a big tax bill, set up a DAF and donate your stock to it. Now you can deduct the $50K contribution from your taxes. Since you’ve exceeded the standardized deduction limit, you can also deduct the $11K, bringing your total deductions to $61K, which will help offset the tax liability triggered by your bonus. Within the DAF, you may liquidate the security and diversify for long term growth, and there will be no tax consequence. You have the option to allow your DAF to grow or disperse the funds to charities of your choice immediately. 

People give to support causes they believe in, but if you’re going to give, you might as well get all the tax benefits you’re entitled to. All it takes is a little planning. If you have questions about how to reduce your tax liability, contact The Planning Center today. As dedicated fiduciaries, we’re committed to helping you build wealth and achieve your financial goals.