Planned Giving Strategy Update

(Does not apply to your 2017 tax return) Recent tax reform has given us a reason to examine our charitable gifting strategies. Because this involves taxes, it may not seem as if this advice is “simple” but I assure you, it is worth understanding.

Whether we give our time, our money, or our goods away, the desire to help someone in need can bring great satisfaction. That principle must first be present before anything that follows will matter. Given the amount of time (your most valuable possession) that you give to your causes, let us proceed with the certainty that kindness resides firmly in your personal makeup. Once the desire to give is present, we should make our financial gifts as effective as possible. Let us briefly examine the types of monetary assets we can give.

  • Cash: We can simply write a check. Powerful? Yes, as every organization can benefit from a cash gift. If you give cash, you may be eligible receive an income tax deduction if you itemize your deductions on Schedule A of your tax return (more on that later). The recent Tax Cuts and Jobs Act of 2017 (“tax reform”) raised the amount of cash gifts that can be deducted on your tax return to 60% of your Adjusted Gross Income (AGI).
  • Securities (or Investments): Rather than give cash, you can donate securities that you own. The deduction is valued at the Fair Market Value (FMV) on the date of the gift, typically the closing price for that particular security. Opportunity: Since the donation is valued at FMV, then you are also giving to charity any embedded capital gains that have arisen during the time you have owned the security. Since the charity does not pay taxes, they can sell the security without realizing any capital gains! We have successfully created the Win-Win-Lose! You get a charitable deduction (win), the charity receives a much needed donation (win), and the IRS does not get to collect the capital gains tax (lose). You are smiling, aren’t you?

Charitable deductions made by individuals are typically claimed as an Itemized Deduction on Schedule A of your tax return. For 2017, if your Itemized Deductions (certain medical expenses, state & local income taxes, property taxes, mortgage interest, charitable contributions, and other miscellaneous items) exceeded the Standard Deduction, then you claimed your Itemized Deductions, i.e. your charitable contributions were deductible. The recent tax reform dramatically increased the Standard Deduction. For single filers it went from $6,360 to $12,000 and from $12,700 to $24,000 for Married Filing Joint (MFJ) couples. Also of importance, there is now a limit on how much state & local income tax, and property tax can be deducted. The limit is $10,000 whether you file Single or Married Filing Joint. Using a married couple as an example, let us compare 2017 vs. 2018 as it related to Itemized Deductions.

                                                                           2017                             2018

State & Local Income Taxes             $14,500                         $14,500 (subject to $10,000 cap)

Real Estate Taxes                                    $12,000                         $12,000 (will be $0 due to cap)

Mortgage Interest                                  $  7,000                        $  6,600

Charitable Contributions (cash)     $  7,000                        $  7,000

Total Itemized Deductions               $40,500                         $23,600

 For 2018, this couple will use the Standard Deduction, essentially rendering zero income tax benefits on their charitable contributions. Remember, the first rule of giving is to have a desire, but, if we can get an income tax benefit, that is even better. How can we get a tax deduction for our giving in this example? If your state, local, and real estate taxes are $10,000 and your mortgage interest is $6,600, then the first $7,400 of charitable contributions have zero tax benefit since you get the $24,000 standard deduction at a minimum.

What if there was a way to put several years of your charitable contributions into a fund that gave you a deduction for the full amount of that contribution but did not require you to grant that money to your charity of choice until you were ready to do so? Those funds exist and they are called Donor Advised Funds and they can be established in many places, including local community foundations (we are very lucky in central Ohio to have The Columbus Foundation as a resource), or at large investment custodians that have established a charitable foundation, such as Schwab Charitable, Fidelity Charitable, and Vanguard Charitable.

Now let us marry the previous two discussions of tax reform and charitable contributions to give you and actionable idea that we have been using with our clients. If our fictitious example plans to give regularly now and during retirement, we would put 5 years of future contributions into a Donor Advised Fund in 2018, totaling $35,000. Now, our Itemized Deductions are $10,000 + $6,600 + $35,000 for a total of $51,600! Assuming a marginal tax bracket of 30% (federal and state), the excess amount over the Standard Deduction ($51,600 – $24,000 = $27,600) means our charitable contribution saved us almost $8,300 in taxes! Additionally, we are having clients contribute to their personal Donor Advised Fund using appreciated securities rather than cash, so we are getting capital gains tax liability out of their household. It should be noted we then use the cash they could have given to buy-back the investment securities in their investment account. Now, we have a Donor Fund by which we will make grants to our preferred charities who will receive our gifts with the name of our personal Donor Fund and its donors (you). My wife and I have one of these funds and it is named the Jamie & Teresa Menges Charitable Fund. Each grant we make has that name on it. Pretty simple!

Fast forward to 2019 – our client will take a year off from charitable giving and use our Standard Deduction. The following year, 2020, we may consider making several years of charitable contributions again, or depending on circumstances, we may elect to again take the Standard Deduction. Additional grants to charity can continue to be made when the client is ready. This strategy of alternating years for charitable contributions using a Donor Fund allows your ultimate gifts to charity to go uninterrupted, but also allows for you to receive from income tax benefits from your generosity.

To discuss how you might use any of these strategies, please feel free to contact me at your convenience. Best wishes for continued prosperity.

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