Saving Your Charitable Contribution Deductions from Tax Reform

Many savvy taxpayers will change their charitable giving strategies after the Tax Cuts and Jobs Act.

For years I’ve advised that writing checks to charities each year or more frequently is an inefficient way to donate. It’s even less efficient now.

The latest tax law made several key changes that can reduce the tax benefits of charitable giving.

First, the standard deduction is doubled to $24,000 for a married couple filing jointly. You receive a deduction for charitable contributions only if you itemize expenses on Schedule A, and you do that only if the total of your itemized expenses exceeds the standard deduction. Second, many itemized expense deductions were eliminated or reduced, though the charitable contribution deduction wasn’t directly affected.

The result of these two changes is that far fewer taxpayers will be deducting itemized expenses because of the higher standard deduction. They won’t receive a separate tax benefit for charitable giving.

To maximize tax benefits from charitable giving, consider two strategies that are likely to be more widely used in the coming years.

One strategy is to bunch several years of charitable contributions in one year using a donor-advised fund(DAF). Many DAFs are available, and they can have other names, such as community funds and charitable gift funds. Many localities offer versions of the DAF, as do most of the larger discount brokers and mutual fund families.

A sponsor, such as a broker, creates the DAF and obtains charitable organization status from the IRS. You make gifts to the DAF. The contribution is held in a commingled fund. You no longer have ownership of the money and don’t have a separate account. But the DAF tracks the amount you contributed, the investment earnings on it, and any charitable contributions made from it. Often, you decide how your contributions are invested.

You recommend the charitable contributions made from your portion of the DAF. Since technically the money no longer is yours, you can only recommend gifts. But there’s no record of DAFs declining recommendations, as long there is sufficient money associated with the donor. Some DAFs
provide checkbooks to donors so they can give checks directly to charities. Donations can be made only to IRS-qualified public charities.

The key to the DAF under the new tax law is that you take a charitable contribution deduction in the year you contribute to the DAF. Once money is in the DAF, you don’t have to recommend charitable contributions from the DAF to individual charities on any schedule. So, you can donate to the
DAF an amount equal to the charitable contributions you plan to make over the next two or more years.

Then, make contributions from the DAF to individual charities over time. You can deduct the  contribution in the year you donated to the DAF, not when the individual charities receive money.

The charities receive the same amount of money on the same schedule as they would have. But you qualify to deduct the entire amount in one year. That increases the probability your itemized expense deductions the year of the DAF contribution will exceed the standard deduction amount and you’ll receive an additional tax benefit for the contributions.

A way to enhance the use of the DAF is to donate appreciated securities, such as stocks or mutual fund shares, instead of cash.

When you donate appreciated securities, you deduct their fair market value on the date of the gift. Also, you don’t owe any capital gains taxes on the appreciation that occurred during your holding period. You make a charitable contribution without having to come up with cash, and you avoid capital gains taxes on appreciation. Donating appreciated securities is a much more tax-efficient way to give than writing
checks against cash accounts on which you’ve already paid taxes.

Giving this way is very easy when the DAF is sponsored by the same financial firm as your taxable investment account. Once you open an account at the DAF, securities or cash usually can be transferred to the DAF over the telephone or online.

Keep in mind there still are annual limits on the amount of charitable contribution deductions. For donations to public charities, such as a DAF, you deduct no more than 50% of adjusted gross income in one year.

But the limit is 30% for contributions of long-term capital gains property. Any additional contributions
above the limit can be carried forward up to five years and potentially deducted then.

An alternative is to set up a private foundation. For that to be worthwhile, you should be considering donating $250,000 or more at one time.

Also, there are expenses to create the private foundation and operate it each year. Plus, the IRS will require the foundation to donate a minimum amount of its assets to other charities each year. The annual limit on deductible donations to private foundations is 30% of adjusted gross income, and 20% for long-term capital gains property.

There are other ways to give when you want to donate a substantial amount or want to create a stream of
lifetime income, such as the Charitable Remainder Trust. But when you’re looking to restore tax deductions for routine charitable gifts, consider using a DAF.