Were Americans as generous with their charitable giving in 2018? A record $410 billion dollars was given by individuals in 2017, according to Giving USA. Two factors may reduce giving: the recent income tax cuts and a rough-and-tumble December for investors.
However, it’s the start of a new year. Meet with your advisers and get a jump on giving strategies for 2019 for three reasons:
- Be more impactful in your giving: Roughly one-third of the year’s online giving is done in December, according to statistics at CharityNavigator.org. What if you took the time to define your charitable mission and did your homework in selecting charities?
- Consider the “wealth effect”: Investment gains were strong in 2017 and donors felt “wealthier.” The S&P 500 gained 21 percent. It dropped four percent in 2018. Donors tend to sit on their wallets when their portfolios are down. But isn’t that the time when charities need more help?
- Tax savings: What if giving is the cheaper route?
This article focuses on tax planning opportunities for charitable giving, specifically about the impacts of the Tax Cuts and Jobs Act and Qualified Charitable Distributions (QCD). But first, a review of why people give (note: tax benefits are not the primary reason).
What do you get out of donating? The top five include:
- Personal experience
- Making a difference
- Being proactive in solving a problem or taking a stand on an issue
- Being motivated by personal recognition and benefits
- The belief that giving is a good thing to do
Challenges from the Tax Cuts and Jobs Act
The true impact won’t be available until after returns are filed in April. Some – such as Giving USA – feel that charitable giving will decrease. Others say high-income taxpayers will be motivated to donate more.
It’s now harder for individuals to reach the threshold required to qualify for the deduction. Taxpayers have a choice: Take the standard deduction, or itemize their deductions. The standard deduction doubled; state and local taxes are capped at $10,000; and mortgage interest may be limited. Council on Foundations estimates 5 to 12 percent fewer Americans will itemize.
Planning solution: If you can only take the standard deduction, then consider “lumping” contributions into every two or three years in an effort to itemize deductions for that year.
4 questions regarding qualified charity distributions
The impact has changed because more taxpayers are taking the standard deduction. QCDs are direct transfers from IRAs to eligible charities. The IRA account holder must be 70-1/2 years or older, and the beauty of the QCD includes:
- The distribution goes directly to a charity from IRA
- It’s not includible in your income
- It counts toward satisfying your required minimum distribution (RMD)
1. Can you make a QCD from a 401(k)?
No. QCDs come only from IRAs and not from employer-sponsored plans (SEP, SIMPLE and 401(k)). You possibly could roll those employer plans to IRAs to be eligible for QCDs.
2. What if you took the RMD earlier in the year — can you take a QCD later to offset the RMD income?
No. This is a key reason to jump-start your charitable giving strategy now rather than waiting until year-end. Say your RMD for 2019 will be $20,000 and you will give $10,000 to qualified charities. If you made $10,000 QCDs early in the year, then you’d only report $10,000 in taxable RMD. But if you already took your RMD and waited until year-end to donate, then it gets more expensive. You could take an additional $10,000 as QCD — but you’ll report $20,000 in taxable RMD and your IRA is $10,000 lighter.
3. If you qualify for itemized deductions, is the QCD still better to do?
Yes. It reduces your AGI, which is more favorable than a charitable deduction which reduces taxable income. Reduced AGI might lower the threshold for deductibility of medical expenses.
4. Can you use a donor-advised fund for QCD?
No. Both donor-advised funds and private family foundations are excluded.
There are many ways to be impactful with your generosity. You can give your time or talent, adopt an annual giving campaign, and be part of your estate plan utilizing beneficiary designations and specifying bequests. And you have many resources for due diligence and thinking things through including your trusted advisers, CharityNavigator.org, GuideStar.org and Community Foundation, to name a few.
Finally, in the words of Andrew Carnegie, “It is more difficult to give money away intelligently that to earn it in the first place.” Good luck.
You can also view this article on the Reno Gazette Journal.