New Tax Law | Charitable Giving

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The new tax law nearly doubles the standard deduction for individuals and families, simplifying the filing process for millions of Americans, but complicating giving strategies for many who made a habit of deducting their charitable contributions.

Indeed, an estimate from the Washington, D.C., Tax Policy Center is the number of itemizers will drop from 46 million to 13 million. Meaning, most taxpayers will have little tax incentive to donate cash or stock to charity, reducing giving by $13 billion to $20 billion a year.

There are tactics that can help donors with their tax returns while still providing charities with badly needed funds. Experts are suggesting that those on the cusp of itemization should consider giving twice as much to charities in one year by pooling gifts even if it means giving nothing the following year. The idea is to accumulate enough deductions to itemize and write off more than the standard deduction. This expands the standard amount and maximizes tax savings through itemization.

However, this makes planning difficult for charities, as they usually think about annual budgets. Fortunately, another plan of action is donor-advised funds (DAF). They act like personal charitable savings accounts or private foundations, but without all the legal and accounting costs. They allow contributors to make a donation and take a tax deduction in the same year. Then, the contributors can direct their money to be paid to selected charities over time. You can set up DAF accounts at a community foundation or investment firm. You add assets whenever you want, deciding later what to donate and to which organizations.

You tell the fund’s administrator how to spend the money by selecting eligible charities and amount to be donated. DAFs can also accept securities, and this is an excellent way to unload appreciated stocks without paying capital gains tax. When you put appreciated securities into a DAF, you get to deduct the full current value from your taxable income that year. With the stock market at record highs, many investors have portfolios full of appreciated stock they cannot sell without paying capitals gains taxes. It can be a great opportunity to transfer appreciated stocks, mutual funds, and ETFs into a donor-advised fund and get the deduction right away.

Of course, tax write-offs are not the only reason people make donations. There is a genuine wish to do good. Nevertheless, it cannot be denied that there is usually an enormous amount of giving in the last two days of a year, meaning that tax benefits definitely drive a lot of people. By taking advantage of DAFs, you benefit from smart tax planning.

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