Year-End Gift Strategies
The Tax Cuts and Jobs Act brings changes to the charitable giving landscape. Fewer taxpayers will be subject to estate and gift tax because the estate and gift tax exemption was essentially doubled from $5.49 million per person to an estimated $11.2 million. Married couples filing jointly will have a lifetime estate and gift tax exemption of $22.4 million.
Additionally, the new tax law almost doubles the standard deduction to $12,000 for singles and $24,000 for joint filers under the age of 65 and, at the same time, caps or eliminates other deductions. Accordingly, it will no longer make sense for as many taxpayers to itemize.
One favorable change to note is that if you are able to itemize, your deduction for cash gifts will be limited to 60% of adjusted gross income an increase from 50%. Your deduction for stock gifts is limited to 30% of income. You still have up to six years to use your charitable deductions.
Gift Planning Strategies Under the New Tax Laws
Bundling: Because the standard deduction has been increased, fewer donors will itemize and be able to take advantage of the charitable deduction. However, if you are close to the threshold for taking the standard deduction, you may be able to get a tax break for your donations by employing a strategy called bundling. To bundle gifts, you would make two or more years' worth of donations in a single year so that the total of all your other deductible expenses will be enough to itemize that year. Then, you would skip donating for the next year and return to taking the standard deduction.
The concern with bundling is that, although this strategy will provide a tax break for you, it results in an inconsistent income stream to the charity. However, you might consider making a bundled donation to a donor advised fund, deduct the entire amount of the gift in that year, and direct the donor advised fund to make distributions to the charity over the next few years. In this way, you are able to take the charitable deduction and provide a consistent income stream to the charity. Of course, you may also make donations in "off" years while taking the standard deduction.
Donor Advised Funds may be set up through a variety of financial services organizations and community organizations. Be aware that certain rules and restrictions may apply, and fees may be assessed. However, DAF's are often flexible about accepting both cash and non-cash gifts and can be a great way to involve future generations in philanthropy.
Gifts of Non-Cash Assets: Non-cash assets can provide an effective way to support charitable giving. In the United States, approximately 90% of wealth is held in non-cash assets, such as homes, cars, stock, mutual funds, retirement assets, and collections. With the many competing demands for our cash (mortgage payments, tuition, vacations, etc.), it makes sense to consider using non-cash assets for charitable giving. Then, you can consider the totality of your wealth, rather than just cash, which will allow you to contemplate making gifts larger than you thought you could make, will not affect your current lifestyle, may provide tax benefits and other savings, and may be used to create an income stream. Ultimately, these gifts of non-cash assets can cost less than if you just gave cash. This is especially true of gifts of appreciated securities that have been held for a year or more as detailed below.
Gifts of Appreciated Securities: With the stock market at record levels, it is a great time to make a gift of appreciated securities. If you have held stock, mutual funds or other securities for over one year and the value of those securities has risen, you may donate those appreciated securities to a charity like US . You will receive a double tax benefit: (1) avoidance of any capital gains tax that would be due if you were to sell the securities, and (2) if you itemize (see above), a tax deduction for the fair market value of those securities. Even if you do not itemize and are not able to deduct the amount of the gift, the capital gains tax will be avoided.
Gift of Retirement Assets:
- IRA Charitable Rollover: If you are 70½ years or older, the charitable IRA Rollover provisions are now permanent and can be very beneficial. You may transfer up to $100,000 directly from your IRA to a nonprofit in a tax neutral transaction. An IRA Rollover gift will not be included in taxable income, will qualify as a required minimum distribution, but will not qualify for a charitable deduction.
- Beneficiary Designation: If you name US a beneficiary of a 401(k) or traditional IRA, you will retain control of your assets during your lifetime and can make changes as your circumstances dictate. It's very easy and incurs no cost. Assets from a 401(k) or traditional IRA will not be taxed if left to University School but may be heavily taxed at your death with little remaining for your heirs. Accordingly, consider using IRA assets to make gifts to US and leave other appreciated assets (stocks and real estate) to your family.
- Gifts that return income. If you are interested in making a charitable gift but you also need income, you might consider establishing a charitable remainder trust. Because these gifts require larger amounts, you may be able to itemize in the year they are funded. Because you will receive income for life or for a period of years, a portion of the contribution is deductible. These gifts are usually funded with cash, stock, or real estate. If you use non-cash assets to fund a charitable remainder trust, you may postpone the recognition of any capital gains and may pay it in smaller amounts over a period of years.
DISCLAIMER - The information included here is not a substitute for talking to a professional tax advisor.