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Change breeds uncertainty, but it also creates an opportunity to evolve. With the enactment of the 2017 Tax Cuts and Jobs Act, we have seen plenty of change. One constant, however, is the human desire to create a lasting impact in the lives of others.

Gifting to a qualified charity is a great way to accomplish that goal, but under the new tax code, which gifting method should be used to achieve that while maximizing the tax and estate planning benefits? It depends on a number of factors:

  • The dollar amount of the gift
  • The donor’s tax bracket
  • The type of gift
  • The donor’s unique tax profile
    • For example, does she have required minimum distributions (RMDs)?

The rule of thumb is to write a check to each charity if the gross gifting amount is less than $1,000. However, if a donor is giving $1,000 or more to a particular charity, it is best to consider the use of a more sophisticated method. Three of those methods are listed below and each gives donors the ability to evolve with the new tax code while continuing to create lasting change.


DONOR ADVISED FUNDS

A donor advised fund allows the donor to gift charitably using cash, appreciated stock or other methods. By gifting appreciated stock, the donor eliminates the capital gain tax liability she would have paid if the shares were sold in her personal account. Because the shares were gifted then sold within the donor advised fund, the capital gain on the gifted shares is permanently forgiven. In addition, the donor’s immediate deduction is equal to the fair market value of the securities on the day of gifting, not the basis in the shares (i.e. what was paid for them).

Once the donor advised fund has custody of the shares, the payment of the funds to the donor’s charity (or charities) of choice can be made. A benefit of contributing to a donor advised fund, which can be administered by the Catholic Foundation of Michigan, is that the donor has the ability to be flexible in choosing both the timing and recipients of the grants without the administrative burden of running a private foundation. Contributions can be made as frequently as the donor would like and grants can be recommended at the donor’s discretion. Figure 1 is a quick visual of how a donor advised fund operates.

Figure 1: Donor Advised Funds

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With respect to estate planning, it is important to note that the irrevocable contributions to a donor advised fund allow the donor to reduce the size of her potentially taxable estate.

Please see your tax advisor for actual calculations based on your specific situation.


BUNCHING DEDUCTIONS

Under the new tax law, each taxpayer is given a $12,000 standard deduction while married couples filing jointly are allotted $24,000. That is an 89% increase from the 2017 standard deduction amounts. As a result, tax professionals are recommending a new strategy for itemizing deductions, known as “bunching.”

For example, let’s assume a couple – Joseph and Jane – are married filing a joint return in 2018 and 2019 with the following itemized deductions:

Deduction

Tax Year 2018

Tax Year 2019

State Income Tax

5,000

5,000

Mortgage Interest

7,000

7,000

Charitable Contributions

6,000

6,000

Property Tax*

5,000

5,000

Total:

$23,000

$23,000

*$3,000 summer payment and $2,000 winter payment

Because they are allotted $24,000 per year for their standard deduction, they would not itemize in either year and instead take the standard deduction. If, however, Joseph and Jane were to hold off on making their 2018 charitable contribution and winter property tax payment until 2019, they would have the following deductions:

Deduction

Tax Year 2018

Tax Year 2019

State Income Tax

5,000

5,000

Mortgage Interest

7,000

7,000

Charitable Contributions

0

12,000

Property Tax*

3,000

7,000

Total:

$15,000

$31,000

*$3,000 summer payment and $2,000 winter payment

Joseph and Jane would utilize the standard deduction of $24,000 when calculating their 2018 taxes, but itemize their deductions in 2019 when they total $31,000. This is called bunching; in this scenario, it has resulted in an additional $7,000 in deductions for the couple over the course of two years. Chart 2 below visually depicts the benefit of choosing to bunch deductions, while Chart 1 shows the deductions without bunching.

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Please see your tax advisor for actual calculations based on your specific situation.


REQUIRED MINIMUM DISTRIBUTION GIFTING

Finally, a donor can give charitably using required minimum distributions (RMDs). If the donor is 70½ or older, she is required to take a distribution from her retirement plans, even if she does not need it. The IRS allows each donor the option of transferring up to $100,000 per year directly to qualified charities of her choice.  

The transferred funds are a qualified charitable distribution (QCD) and offset the income dollar for dollar that would otherwise show up on the donor’s federal and state returns. By using a direct transfer from her IRA to the charity, the donor effectively gets a 100% deduction. This method can also serve to reduce her Medicare premiums and Social Security taxability by lowering adjusted gross income (AGI).

Please see your tax advisor for calculations specific to your situation.

In conclusion, there are a number of ways to give charitably while optimizing tax benefits. A quick summary:

  • Donor advised funds: immediate deduction and flexibility without the administrative burden
  • Bunching deductions: maximize standard and itemized deduction benefits
  • Required minimum distribution gifting: donate up to $100,000 per year directly to qualified charities

Learn more about the Catholic Foundation's Preferred Professional Advisors that can assist you with these strategies.

Nemes

By: Christopher C. Nemes, CPA

Chris practiced as a CPA for several years with Deloitte prior to joining Raymond James as an investment professional. He is a parishioner of St. James Catholic Church in Novi, MI and serves as a Preferred Professional Advisor for the Catholic Foundation of Michigan.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Raymond James is not affiliated with Catholic Foundation of Michigan. Christopher C. Nemes is a Financial Advisor with Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC. He can be reached at 27333 Meadowbrook Rd. Ste 110, Novi, MI 48377 or 248-449-5436.

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