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Tax Advantages of Charitable Giving

Anh Tran, Certified Financial Planner and Estate Planning Attorney, shares tax tips and advice with Impact Giving Partners and friends at a lunch and learn event in Costa Mesa.

At Impact Giving, we know our Partners and friends’ primary motivation to donate to charity is simply to help those in need. However, it’s also important to understand the great tax benefits that exist for those who give, because knowing how to make the most of your tax deductions can allow you to give even more!

We recently hosted a lunch and learn event to help our Partners and friends understand the great tax advantages of charitable giving and how things have changed as a result of tax reform. Impact Giving Partner and Board Member Anh Tran, Certified Financial Planner and Estate Planning Attorney, shared the following tips and advice:

3 Smart Ways to Give

While cash gifts are great and can be very helpful to non-profits, these non-cash methods of giving benefit charities and also come with tax advantages:

  1. Donate appreciated stock instead of cash. If you want to give a big gift and have long-term investments that have appreciated in value, you can get a better return by giving the gift in stock rather than cash. The reason? If you give stock rather than cash, no one pays taxes on the gains. (The charity is tax-exempt, so they can sell the shares you give them without paying taxes on them.)Imagine if you had 100 shares of a stock that had doubled from $50 a share to $100. If you sold all 100 shares, you’d realize $10,000 but might be left with only $8,500 to give to charity after paying a 15 percent long-term capital gains tax. By giving the shares themselves rather than selling, you pass the whole $10,000 to the charity and get to take a deduction on the full $10,000 as well.
  2. Use a Donor-Advised Fund. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund, you are eligible to take an immediate tax deduction – but you can decide to give whenever you want. The funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity. The gift is irrevocable and once you pass, you can name a successor advisor to recommend grants.
  3. Donate your Qualified Charitable Distribution. Did you know that people who hold Individual Retirement Accounts (IRAs) are required to take a required minimum distribution (RMD) at age 70½ – even if they don’t need or want the funds?  That distribution increases the IRA holder’s total taxable income and could potentially push the taxpayer into a higher tax bracket. However, if you donate your IRA distribution to a charity, the funds are then not included in your income. A Qualified Charitable Distribution (QCD) allows individuals who are 70½ years old or older to donate up to $100,000 total to one or more charities directly from a taxable IRA instead of taking their required minimum distributions.

Tax Reform Impact on Charitable Giving

Tax reform has brought major changes for the current tax year, including an increase to the threshold if you want to itemize your deductions. In any given year, taxpayers can choose between claiming the standard tax deduction or itemizing their deductions. Beginning in 2018, the individual standard deduction is increasing from $6,350 to $12,000; and the deduction for those filing jointly is increasing from $12,700 to $24,000.

If your deductions total well over $12,000 (or $24,000 if you file jointly), your charitable deduction will likely remain the same. But if you itemized your deductions in the past and will now instead take the standard deduction, you will no longer receive a specific tax benefit for charitable giving. Here are some strategies to help increase your tax benefits:

  • Bunch your charitable donations. Rather than giving $10,000/year, for example, give $20,000 one year and skip the next year. Or you can choose to put the money into a Donor Advised Fund (see above) and contribute that $20,000 up front so you can still give annually, but pay taxes for one lump sum.
  • Accelerate your giving in a high-income year. The higher your tax bracket, the greater your tax savings as a result of making charitable gifts. For example, if a donor in the 37% tax bracket makes a donation of $10,000, this person may later qualify for $3,700 in savings at tax time. Compare the same $10,000 gift from someone in the 22% tax bracket who will recognize $2,200 in tax savings.

As you can see, it’s more important than ever to make smart financial decisions about charitable giving, and a little planning can ensure that you’re making the right moves – for yourself and also for the charities you support! Take some time to review your tax strategy, discuss your charitable giving plan and explore your options for maximizing your tax savings.

Thank you to Anh Tran for sharing these important tips so we can all be tax savvy in 2018 and beyond!