Managed Philanthropy: Tax-smart charitable giving strategies

November 20, 2022

Topics: Charitable Giving | Tax tips | Taxes | Managed Philanthropy

Media type: Article, Podcast

Managed Philanthropy: Tax-smart charitable giving strategies

5.6 minute read • 

November 20, 2022

Managed Philanthropy: Tax-Smart Charitable Giving Strategies

This article reviews some of the ways in which you may optimize your charitable giving and get a head start on preparing your taxes for 2019 in light of the new tax legislation. Specifically, it reviews a facet of the Tax Cuts and Jobs Act of 2017 (TCJA) that hasn’t truly altered but has indirectly affected charitable donations and the implications of making contributions.

How to handle contributions made to nonprofit organizations.

According to the statistics, 96% of Americans donate either money, things (such as food and clothes), or time to charitable organizations. Although getting a reduction in taxes is one of the reasons individuals donate, most donors are more interested in utilizing the experience of donating to teach their children about the importance of philanthropy and to demonstrate how their family lives out its mission.

Cash Donations Versus Gifts of Highly Appreciated Stock

Making a donation to a charitable organization is simple. Donating appreciated securities directly to a charity rather than doing so via a donor-advised fund (DAF) or foundation is often the most effective course of action. Donating the stock that you’ve been hanging onto for more than a year could be a good strategic move for both yourself and the charity of your choice. The value of your gift is maximized because, in addition to receiving a tax deduction equal to the amount of your contribution, you are exempt from paying any capital gains tax on the appreciation of any stocks you donate. Doing so could prove valuable to all parties involved. Consider the case of a married couple, Harry and Meghan Evans, as an example. The Evans family would like to make a contribution of ten thousand dollars to the public charity of their choice. They have a starting investment fund of $2,000, but they have a total equity of $10,000. If they sell the fund and distribute the money, they would owe a capital gains tax payment of $2,000. (excluding Medicare surcharges and state taxes). However, if they make a gift to a charitable organization in the form of a good or service, they will avoid paying taxes on the capital gain and will be eligible for a deduction for their generosity.

In this case, the charity receives the same amount, but you may potentially optimize your benefits via a tax deduction without paying state or federal income tax on the sale of stock. Therefore, if your holdings are highly concentrated, your portfolio has had considerable growth, or 2019 is expected to be a year with a large income tax bill owing to the sale of a firm, etc., you might consider donating to a charitable organization.

Your available options for charitable giving

Because the limit on the amount that can be deducted for state and local taxes (SALT) has been increased to $10,000 for 2019, the standard deduction for married couples filing jointly has increased to $24,400, and some investors may not be able to give enough to an association or charity to choose to detail. If this is relevant to your circumstances, consider the following:

Prior to reaching RMD age

If the Evans family has not yet reached the age of 70.5, which is the point at which they are required to begin receiving minimum distributions (RMDs) and paying down their mortgage, the standard deduction of $24,400 might prove to be a significant barrier in the way of paying off the debt. One response that some investors have had to the increased standard deduction is to “bunch” the amount of charitable donations they would have made over the course of two or three years into a single year. If the Evans want to give away $10,000 a year to charitable organizations, for instance, they would want to consider making a gift of $30,000 in 2019, after which they would give nothing to charity and instead claim the standard deduction in 2020 and 2021.

In this example, the Evans do not get a tax break for their yearly gift of $10,000 to charity since they do not cluster their donations. DAFs are an option for a multitude of people who are contemplating the “bunching” technique. These funds make it possible for donors to receive a tax deduction for their charitable contributions in the year that they are made, while also enabling them to give any amount they choose to their favorite charities each year from their donor-advised fund in order to meet the annual funding requirements of those charities. In recent years, the popularity of DAFs has increased. In turn, this has provided some assistance to smaller charities in maintaining the necessary funding to support their missions.

After reaching RMD age

When the Evans reach the required minimum distribution age, they will have another choice for their charity, which is known as Qualified Charitable Distribution (QCD). QCD improves under TCJA in that any sum donated to a qualified charity via a QCD is eligible for the investor’s RMD and is not included in taxable income, up to a maximum of $100,000 per year. This exclusion from taxable income is capped at the level of the investor’s highest annual contribution. In 2019, taxpayers who do not itemize their deductions still get the entire amount, in addition to a greater standard deduction of $27,000 (if both couples are 65).

Additional considerations for creating a QCD include:

  1. A minor percentage of your Social Security income may be subject to taxation
  2. The reduction in your AGI should result in a savings of about $1,500 less in Medicare B&D share payments over the next two years.

We can guide you through the process of developing an investment strategy, determining your objectives, and identifying charitable organizations and issues that you and your family wish to support. We advise you on giving strategies, whether to donate cash or securities, best practices for a qualified charitable donation (QCD), details about different types of charities (public charities or foundations), and whether you should give directly or through a donor advised fund (DAF) or foundation. We also educate you and your family on the ways in which you can optimize your gift in a manner that is both timely and appropriate for both you and the receiving charity.

Timing matters

While December is when the majority of gifts are made to charitable organizations, you need to be proactive and organize your donations with your financial strategy earlier in the year. Taxpayers must maintain thorough records, which should include statements from charitable organizations validating gifts. If you are audited by the IRS and unable to verify the value of your gift, the agency may deny your request for a tax deduction.

Galleon Wealth Management does not provide tax or legal advice, and we strongly recommend speaking with a tax or legal professional regarding charitable giving.

To learn more about our Managed Philanthropy Services, contact us at 1-844-GALLEON.