As we look forward to the last few months of 2019, gifting to charities is on the minds of many. When picking your charities of choice, it’s important to take stock of your motivation for gifting in relation to your financial goals as there have been recent changes to the IRS tax rules.
If your primary goal for gifting is to give, then gift away! These limits will have no effect on the benefits to gifting in this regard.
However, if your desire to give is coupled with the associated historical tax advantages, then note that the new IRS rules have limited the effectiveness of gifting for many.
Charitable donations are included as an “itemized deduction” for tax purposes. So, where it makes sense to “itemize” deductions instead of using the IRS “standard” deduction, people are incentivized to make donations. But, the “standard” deduction has doubled with the recent tax law changes, which means that most people will no longer “itemize” their deductions.
In fact, it is estimated that only 10% of tax filers will be better off itemizing in 20191. Thus, for the vast majority of filers, a charitable contribution will not yield any tax benefit.
For this reason, most of those who are looking to make a charitable contribution, should do so solely because they believe in the mission of the organization rather than seeking a tax deduction.
There is however, a smaller percentage of the population, namely the estimated 18 million filers listed above, who may still benefit from the tax deductions. They should consider all of the following reasons to gift this season:
Leaving a Legacy
Making a difference with your wealth for future generations can be very gratifying, meaningful, and helpful to our community.
Receiving Income Tax Deductions
For that smaller pool of people still itemizing deductions, the maximum amount of a deduction is capped by the type of asset given and the type of charity receiving the asset. This cap on charitable deductions ranges from 20% to 60% of a filer’s adjusted gross income (AGI).2
Note that, for individuals who have sold a business and are receiving either a one-time or multi-year payout, these tax-deductible limits may be sufficient help to avoid a large tax burden. Depending on the structure of the charitable gift and the size of the business being sold, there may even be the potential to double-up on planning opportunities. For example, if the charitable deduction is over the ceiling of an individual’s AGI limit, the individual may want to convert traditional IRA money to their Roth IRA.
Avoiding Capital Gains Tax
When you purchase a stock in a taxable account (your non-retirement accounts), you are given a basis or a starting investment value, which is tracked for tax purposes. You have already paid tax on those dollars so the IRS can’t tax you again on that amount. As the investment increases over time, the difference between your basis and the investment’s current value is taxable when you sell the stock. This is called capital gains tax.
There are essentially three ways to handle this tax on the investments: 1) sell the investment and pay the tax, 2) gift the asset to charity and receive a deduction, 3) receive a step-up in basis when assets are inherited upon your passing.
For individuals with large capital gains in their portfolios and who are in higher income earning years, a charitable gift may be a great way to kill two birds with one stone! First by eliminating their capital gains and second, by receiving a tax deduction on the asset.
How to Make Charitable Donations
There are different ways to structure charitable gifts. You can give the money or asset outright to the charity, you can set-up an entity to benefit the charity after your life such as a Charitable Remainder Trust, or you can set up an entity to establish an ongoing gift during your lifetime like a family foundation. Some of these entities/structures allow the donor to make an anonymous gift, while others allow for the donor to leave a legacy after they’re gone. Finding the right gifting structure can assist in leaving a lasting legacy that honors the way you wish to be remembered.
It is important to remember that everyone has unique financial goals and circumstances which should be the guiding factors for any recommended strategies. Gifting may be a part of the strategic plan but only after careful analysis of all the factors involved and their impact.
1The Joint Committee On Taxation https://www.jct.gov/publications.html?func=startdown&id=5093
2IRS Publication 526 (2018), Charitable Contributions https://www.irs.gov/publications/p526
ABOUT THE AUTHOR
Taylor J. Whelan is a CERTIFIED FINANCIAL PLANNER™ Practitioner, Chief Compliance Officer and a Wealth Advisor at Whelan Financial. When Taylor isn’t meeting with his own clients, he is instrumental in business development, conducting investment research, and advancing the company’s technology.
Follow him on LinkedIn @TaylorWhelan
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