December 06, 2018

Make the Most of Your Charitable Giving

Daniel Toledo, CFA, CFP

Daniel Toledo, CFA, CFP
Senior Advisor /Chicago Partners Wealth Advisors

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With the holiday season firmly upon us, investors across the country are starting to think about their charitable giving—which year-end donations they want to make, and how they want to do so.

Yet that decision of how to give is often not lent enough credence. Because while donating time or money is inherently valuable as a means of impacting the world for the better, there are certain personal benefits to giving which can be realized, too, by optimizing your donations to maximize your income tax deductions.

This year, especially, it’s critical that investors think carefully about how they give, as the rules have changed. Consider the recent Tax Cuts and Jobs Act, which doubles the standard deduction to $12,000 for singles and $24,000 for married couples filing joint returns. Your past strategies for giving might no longer benefit you.

Here’s what you need to know to navigate these new complications and ensure you’re giving as efficiently as possible.

1: Utilize donor-advised funds.

Families and individual donors who’ve enjoyed charitable tax deductions for smaller contributions in the past won’t realize those same benefits today, mostly as a result of:

1. the increased standard deduction

2. reduced limits to state and local tax deductions.

If you fall into this camp, it might be wise to consider a Donor Advised Fund (DAF). DAFs allow you a certain flexibility when making smaller donations. Through DAFs, you can front-load several years’ worth of charitable donations into a single tax year gift. That single contribution will qualify for income tax benefits the year you invest it in the fund. As the donor, you can then recommend grants to charities out of the fund’s assets at any time, or you can allow the funds to grow inside your account.

Here’s what it looks like in practice: if you normally give $5,000 per year to charities, you could instead set up a DAF and contribute $25,000 to it once every five years. Each year, you would continue gifting your $5,000 to organizations as you see fit—you can make grant recommendations to any IRS-qualified public charity even during the years when you’re not contributing—but you won’t miss out on any tax deductions because you will have qualified for the income tax benefit with your initial contribution. When it comes time to complete your taxes, you’ll simply report that initial gift to your fund. This also proves more efficient. In addition to enjoying the full tax deduction, you will not need to track down confirmations for every gift you make from the fund.

Finally, DAFs offer tax advantages for gifts of non-cash assets. By contributing long-term appreciated assets such as bonds, stocks, or real estate, you can avoid the 20% capital gains tax and the new 3.8% Medicare surcharge you would have incurred by selling the assets yourself. This allows you to give 23.8% more through the fund, while also receiving a charitable deduction for the fair, full market value of the donated assets.

2: Gift directly from your IRA to meet your Minimum Required Distribution (MRD).

Your MRD is the required amount of money you must withdraw from your retirement account each year. You generally have to start making such withdrawals when you reach age 70½.

The good news, however, is that charitable gifts made directly from your IRA count toward your MRD. That means gifting directly from your IRA allows you to reduce the amount of taxable income you are forced to recognize by the MRD requirement.

If you’re 70½ years or older, you can donate up to $100,000 to charitable organizations in this way. Keep in mind that contributions must be made directly to a qualified charitable organization, meaning you cannot funnel these contributions through a Donor Advised Fund.

3: Involve your kids to benefit your entire family.

However you decide to give back, it’s smart to involve your children in the process to teach the particulars of philanthropy.

A good idea to this end is to set up a fund in your family’s name. This enables everyone in your family to take part in the inherently exciting experience of giving back, as opposed to the family matriarch or patriarch making such decisions alone. Furthermore, by talking honestly with your kids about 1) why you give and, 2) how to give back, you can teach them how to engage in philanthropy intelligently their entire lives.

If your kids are older, you may want to go a step further and help them establish DAFs of their own. You yourself can then receive a deduction for any gifts you make into their DAF and at the same time encourage them to make their own gifts to their funds.

As your children begin to find their own causes, they’ll be in a position to use funds from their DAF to make gifts to organizations that are meaningful to them. Depending on how long the funds stay inside the DAF, the impact of their gifts can grow to double or triple your original contribution.

Regardless of how you give, a financial advisor can help.

The end of 2018 is not only a great time to shore up your personal giving strategies, but to consider partnering with a financial advisor to ensure the gifts you make in this shifting climate are executed as efficiently as possible.

Plus, it’s easy to do. Setting up an account with financial advisors like Chicago Partners, for example, is a matter of contacting us to learn more about your options. We’ll help you from there.

Comments? You can contact me directly via my ExecRanks profile.


"Make The Most Of Your Charitable Giving" was originally published on Medium, on December 6, 2018.

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