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Maximizing the Tax Benefit of Charitable Giving

Posted on December 3, 2019 by

Margaret Amsden

Margaret Amsden

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With the tax law changes that became effective in 2018, the average person has potentially lost the benefit of their charitable contributions.  However, there are several very straightforward options that you may be able to take advantage of.

Before discussing the options, let’s take a quick look at what has caused the issue in the first place.  Prior to 2017, a married couple filing jointly could itemize deductions if their total itemized deductions (medical, real estate and state income taxes, mortgage interest, etc.) exceeded $12,700.  As a result of the Tax Cuts and Jobs Act (TCJA), the threshold a taxpayer must meet prior to being able to itemize almost doubled when it increased to $24,000.  To make it even harder to itemize, the TCJA limited the deductible taxes to $10,000.  As a result, the number of taxpayers able to itemize decreased by more than 50%.  So, what are the options?

#1 Option

With this option, a taxpayer can take advantage of a Donor Advised Fund (DAF).  A DAF is essentially a tax-deferred investment account where:

  1. The taxpayer takes a deduction when the account is funded, thus accelerating the deductions
  2. The taxpayer can pay the amount out to their charities of choice over a period of years
  3. The money grows tax-free in the account
  4. The taxpayer can name a beneficiary to take over the charitable giving in the case they pass while there are still assets in the account

The reason this creates a benefit is the acceleration of multiple years of charitable contributions allows the taxpayer to exceed the threshold in year 1, and take the standard deduction in future years; thus losing fewer deductions cumulatively.

#2 Option

Here, a taxpayer who is over 70 ½ and, as a result, has a requirement to take Required Minimum Distributions (RMD) from their Individual Retirement Account (IRA) can direct those RMDs directly to a charity of their choosing up to $100,000 of RMDs per year.  In this case:

  1. The taxpayer’s gross income is reduced by the amount redirected to the charity
  2. The taxpayer does not need to qualify to itemize their deductions to receive the benefit of the contribution
  3. The taxpayer can make the election annually but should do so prior to taking their RMD

This creates the largest benefit because the taxpayer gets the full benefit every year without any loss of deductions.

To illustrate the impact, the example below demonstrates the Base Case (i.e., annual contributions), Option 1 and Option 2 – as outlined above).

To learn more about taking advantage of these planning techniques, contact Clayton & McKervey today.


Charitable Contribution – Funding Options: (Base Case) After Tax Dollars, (2) Donor Advised Fund, or (3) IRA Required
Minimum Distribution (RMD)
2019 2020 2021 2022 2023 Cumulative Benefit
Base Case: Make charitable contributions yearly with after tax dollars
Adjusted Gross Income $200,000 $200,000 $200,000 $200,000 $200,000
State, Local, City Taxes (maximum) 10,000 10,000 10,000 10,000 10,000
Mortgage Interest 5,000 5,000 5,000 5,000 5,000
Charitable Contributions 15,000 15,000 15,000 15,000 15,000
Itemized Deductions 30,000 30,000 30,000 30,000 30,000
Standard Deduction 24,400 24,800 24,800 24,800 24,800
Greater of Itemized or Standard 30,000 30,000 30,000 30,000 30,000
Taxable Income 170,000 170,000 170,000 170,000 170,000
Tax (a) 29,149 29,149 29,149 29,149 29,149 145,745
Option 1: Fund a Donor Advised Fund (DAF) in Year 1, pay annual charitable from DAF
Adjusted Gross Income $200,000 $200,000 $200,000 $200,000 $200,000
State, Local, City Taxes (maximum) 10,000 10,000 10,000 10,000 10,000
Mortgage Interest 5,000 5,000 5,000 5,000 5,000
Contribute to Donor Advised Fund 75,000
Itemized Deductions 90,000 15,000 15,000 15,000 15,000
Standard Deduction 24,400 24,800 24,800 24,800 24,800
Greater of Itemized or Standard 90,000 24,800 24,800 24,800 24,800
Taxable Income 110,000 175,200 175,200 175,200 175,200
Tax (b) 15,917 30,397 30,397 30,397 30,397 137,505
Benefit of DAF (Option 1 vs Base Case) =(a)-(b) 13,232 (1,248) (1,248) (1,248) (1,248) 8,240
Option 2: Fund charitable contributions from IRA as RMD
Adjusted Gross Income (reduced by portion of RMD going direct to Charity) $185,000 $185,000 $185,000 $185,000 $185,000
State, Local, City Taxes (maximum) 10,000 10,000 10,000 10,000 10,000
Mortgage Interest 5,000 5,000 5,000 5,000 5,000
Charitable Contributions
Itemized Deductions 15,000 15,000 15,000 15,000 15,000
Standard Deduction 24,400 24,800 24,800 24,800 24,800
Greater of Itemized or Standard 24,400 24,800 24,800 24,800 24,800
Taxable Income 160,600 160,200 160,200 160,200 160,200
Tax (c) 27,049 26,961 26,961 26,961 26,961 134,893
Benefit of RMD vs. Funding with After tax dollars (Option 2 vs Base Case) =(a)-(c) 2,100 2,188 2,188 2,188 2,188 10,852
Benefit RMD vs. DAF (Option 2 vs 1) =(b)-(c) (11,132) 3,436 3,436 3,436 3,436 2,612
Assumptions: Married Filing Jointly Gross Income: $200,000
State Taxes: $10,000
Option 2: Taxpayer is required to take IRA Required Mortgage Interest: $5,000
Minimum Distributions (RMD) Charitable Contribution: $15,000

 

Margaret Amsden

Shareholder

Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

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