By: Andrew Rosen, CFP®, CEP® A friend of mine sits on the board of a local charitable organization. Recently, he sent me a note asking if the new tax laws created some good financial planning opportunities for charities. Earlier this year I wrote a blog about Donor Advised Funds, so I forwarded that to him. In addition, I promised I’d write a follow-up about the tax benefits he could share with his constituents.
With the end of the year quickly approaching, and as most people are starting to look for end of year tax strategies, I figured now is an opportune time to get this information out.
What has changed?The big change this year is itemized deductions. Under the new Trump tax law, you are capped at $10,000 on combined real estate and local/state tax deductions. Therefore, in 2017 if you had $10,000 in real estate tax and $15,000 in state income tax, you would add them to your itemized deduction. Thus, you’d have $25,000 to deduct against your federal income tax. Additionally, you could add charitable donations, mortgage interest, and a few others (many of which went away). That would encompass your total itemized deduction. Looking at that same scenario in 2018, you’d be left with just $10,000 of itemized deduction from real estate and state taxes. You’d still add that to your charitable donations and mortgage interest for your total itemized deduction. As you can see, it’s a big hit to deductions for 2018 as these two taxes can be quite high. Keep in mind, you have a choice. You can take the itemized deduction or you can take the standard deduction. Everyone qualifies for the standard, regardless. In 2017, the standard deduction was $6,350 for single filers and $12,700 for those married filing jointly. In 2018, those numbers went way up. It’s $12,000 for single filers and a whopping $24,000 for married filing jointly! Couple that with the cap on certain itemized deduction categories and naturally, you’ll see a lot of people taking their standard deduction in lieu of their itemized deduction. Unless your itemized deduction figure is higher than the standard deduction amount, it means you’d be better off taking the standard deduction.
Net effect on charities.You can see why my friend is concerned, as he is passionate about the charity he so generously donates his time. Moving forward, many of their donors won’t gain tax benefits from a charitable donation because they’ll simply be lumped in with the standard deduction people. This is especially true for retired donors, as they usually don’t have much income tax and typically lower, if any, mortgage interest. Unfortunately, this means charities will undoubtedly be hurt. (Not that the only reason, or even the main reason, to give to a charity is deductions. But, it certainly is a driving catalyst for many.)
Donor Advised Funds to the rescue!This is where I started educating my buddy on Donor Advised Funds (DAFs) – for him, his board, and their donor base. A DAF functions like a kind of personal foundation. Think of The Bill and Melinda Gates Foundation (but at a normal level and minus a few zeros). Basically, you can take current funds and donate them into your own DAF. They are invested in what you’d like until you disburse to a charity (or charities). Important note I must mention: the year you give these funds to your DAF is when you’ll get the tax deduction, NOT the year you disburse to a charity.
Why this is such a good strategy?A DAF allows you to gift a larger sum of money than you typically would to a charity in a given year. You can still give your normal annual amount to the charity; it just comes from your DAF rather than your personal accounts. In doing so, you’ll receive the full deduction this year of what you give to your DAF. Then, you can use that to hopefully itemize deduct this year. This allows for future years the ability to benefit from a very favorable standard deduction limit. For Example: If you file jointly, while typically giving $5,000 a year to XYZ charity and only have $15,000 of other itemized deductions, you would take the $24,000 standard deduction (vs benefiting from the itemized deduction). In turn, this nullifies any tax benefits of your gift. However, if you decide to give $50,000 to your donor advised fund this year, plus your normal $15,000 of other itemized deductions, you will claim a $65,000 itemized deduction this year on your federal taxes. From there you could still give $5,000 a year to XYZ charity, just these gifts will come from your DAFs. Then in future years, you’ll receive the normal standard deduction. Hopefully, that’s more than you would itemize anyway. It’s a win for you, a win for my friend, and most importantly a win for the charities.
Here’s a little secret to make this entire thing even better. You can gift highly appreciated stock in-kind (meaning without selling) to your DAF. Then, you can sell it and reinvest however you’d like. The benefit here is you don’t pay any tax on the gain, while still receiving a charitable donation for the current fair market value of securities!
That’s a wrap.I have always been charitably inclined myself. So, my friend’s question totally struck a chord. This fantastic strategy needs to get more press. Great people like my friend need to know this kind of thing to keep doing the selfless work I so admire. Certainly, if there are questions or you’d like help in setting up your own Donor Advised Fund, don’t hesitate to reach out! [email protected]
In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.