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Charitable Donations | Tax Reform Update

The “Tax Cuts and Jobs Act” of 2017 brought sweeping changes to the standard deduction and allowable itemized deductions for taxpayers which will result in significantly less taxpayers claiming itemized deductions (refer to the prior BKC post for more details - Standard Deduction & Itemized Deductions | Tax Reform Update. As a result of the changes, the Tax Policy Center estimates 21 million taxpayers will stop claiming charitable deductions. According to estimates, households making between $86,000 and $150,000 will see the percentage claiming charitable deductions plummet from 39 percent (pre-2018) to only 15 percent.

What can you do to continue claiming the itemized deductions, specifically the charitable deduction? The best approach to taking advantage of the new tax law is called “bundling” your deductions. This strategy is as follows - you decide to “bundle” all of your itemized deductions in one year (ex. medical expenses, property taxes, state tax payments and charitable donations are deductions you can control) so you can claim itemized deductions in that given year. The following year you limit these payments and claim the increased standard deduction. Use of a Donor Advised Fund (DAF), donations of appreciated stock and qualified charitable distributions (QCD) are all effective strategies that can be used in coordination with or without the bundling strategy to secure your tax deductions and help your charitable organizations thrive.

DAF gives you the flexibility to choose when the organization receives the cash and you claim the deduction in the year you contribute to this fund. For example, if you prefer to donate $10,000/year to your local church but are concerned you may not receive a tax deduction for this donation due to the new tax bill, use of a DAF may help. In this example, you decide to contribute three years’ worth of donations to the church plus an additional $2,000 for other miscellaneous charitable giving (ex. $30,000 + $2,000) in 2018, but think it may be better for budgeting and planning purposes if the church only received the $10,000 from you each year and you are not sure where you would like to contribute the additional $2,000. If you set up a DAF and contribute the $32,000 to this fund, you get the tax deduction in the year you contributed to the DAF (2018) and then you direct the DAF to send $10,000 in 2018, 2019 and 2020 to your local church (and the $2,000 to any other non-profit of your choosing in any year). This accomplishes your goal of receiving the tax deduction and consistently donating to your organization on an annual basis. Please contact your financial advisor for instructions on how to set up a DAF and discuss if there are any restrictions.

Appreciated Stock Donation gives you the ability to contribute appreciated stock held more than one year to your non-profit of choice OR contribute this to the DAF in order to maintain control of when the non-profit receives the funds. You not only get a tax deduction for the fair market value of the stock you’ve contributed, but also do not have to pay tax on the capital gains from the stock appreciation (vice versa is true - if stock is held at a loss you are better off selling it and then contributing the cash to the non-profit or DAF). Many small charitable organizations do not accept or may have difficulty accepting stock donations so please contact the organization prior to this decision or utilization of a DAF is encouraged.

QCD gives anyone 70 ½ and older the ability to make a direct transfer of IRA balances of up to $100,000 per year to charity. These donations satisfy your required minimum distribution AND do not have to be considered taxable income. One major restriction is QCDs must come from IRAs and cannot come from 401(k)s. Please contact your financial advisor or IRA brokerage company for specific instructions on how a QCD should be completed.

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