If your tax returns were a bit of a shock this year, it’s time to strategize.
Those with high incomes, especially those with income mostly from W-2 sources, were particularly affected by the tax reform of 2018. The biggest change regards deductions. Standard deductions were significantly increased, while some itemized deductions were removed or lessened. High-income taxpayers didn’t get much of a break from the tax-law changes, and they were likely to pay more on their 2018 returns.
If this was you, now is the time to proactively affect your 2019 returns. Most of the tax-reform law will expire in 2025. To minimize your taxes until then, let’s first look at your charitable-giving strategy.
Charitable Giving Strategies, 2019-2024
Charitable giving might now be one of the biggest levers you can use to affect your overall tax liability. Because standard deductions were raised significantly (roughly 90% for all filers), many donors who itemize their deductions may have lost the tax-minimizing value for their donations. The giving strategy now: consider donation bunching, create a donor advised fund, and give appreciated assets to reduce capital gains tax.
Bunch Your Donations Every Other Year
To maximize your write-offs, consider bunching your donations every other year. By saving your donations in year one and then giving two years’ worth in year two, you’ll take full advantage of the new, higher standard deductions while also reaping the tax-saving benefits for your charitable giving.
For example, the standard deductions are now $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly. If you are married, filing jointly and giving $20,000 per year, then you’ll likely take the standard deduction and not get an extra write-off for your donations.
If instead you bunch deductions every other year, you could see a larger cumulative deduction. In this example, the donor would realize an extra $6,800 in deductions over a four-year period by bunching. Of course, if you give more, then you’ll realize more deductions every other year.
The big problem with bunching is the impact on the charities themselves. Many small- to mid-sized nonprofits are tight on cash flow and run their annual operating budget from donations within the same year. They are without endowments or foundations to smooth the year-over-year gaps in donation flow. To solve this problem, while simultaneously maximizing your write-offs, consider a donor-advised fund.
Create a Donor-Advised Fund
A donor-advised fund (DAF) is a charitable fund set up in your name at a sponsoring nonprofit (such as a community foundation). Once established, you make charitable contributions into the fund as often as you like, receive an immediate tax benefit, and then recommend grants from the fund to your favorite qualified charities over time. Money left in the fund is invested.
Fund your DAF every other year to bunch donations and maximize your deductions, while continuing to support the charities you love on a regular basis. Win-win.
Donor-advised funds have serious charitable-giving potential. Monies left in your DAF are invested based upon your preferences, so they have the potential to grow, tax-free, while you’re deciding which charities to fund.
In addition to cash, you can donate stocks, appreciated assets, your RMDs, and non-publicly traded assets such as real estate or private company stock to your DAF. Your charitable deduction is the value of the asset at the time you transfer it, and because you receive an immediate deduction, your contributions are irrevocable.
Typically, you’ll pay an administrative fee and any investment fees for the administration of the account, so be sure to check with the nonprofit for their rates.
How to set up a DAF: Look for public charities that sponsor donor-advised funds (many community foundations and charitable arms of investment firms do) and ask about their administrative fees.
Give Appreciated Assets Instead of Cash or a Check
If you really want to multiply your giving, donate an appreciated asset to your DAF instead of cash. For investors, your portfolio is a great place to start. In today’s market, chances are you have a number of appreciated equities.
If you partner this strategy along with the bunching strategy mentioned above, you can really maximize your tax savings.
Donating an appreciated asset gives you three main benefits:
- You deduct the asset’s current value, which, of course, is higher than what you paid out of pocket.
- Avoid capital gains tax—up to 40+%!
- Keep your cash in your pocket. Giving assets is especially beneficial in a year when your cash may be tight.
The key to donating stocks is to transfer them directly to the charity. If you sell them first, you’ll trigger all the taxes mentioned above and reduce the net amount the charity receives.
Read more about donating appreciated assets to charity in our recent Power Giving blog.
Bottom line: Although the tax reform of 2018 may have impacted your write-offs in negative ways, consider the strategies above to take advantage of the new, higher standard deductions and your passion to serve your local community.
Need help maximizing your giving within the new tax laws? As CERTIFIED FINANCIAL PLANNERSTM, we’re happy to help you develop a giving strategy that will support the charities you love while maximizing your tax savings. Simply contact us, and we’ll give you a call—at most—within a business day.
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Related Article: Power Giving: Smarter Ways to Donate
Categories: Tax Planning, Tax Strategies, Tax Management, Tax Minimization, Charitable Giving Strategies
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.