Incorporating Tax Reform into your Charitable Plans

Major tax reform is official, as Congress has signed off on a bill that brings the most widespread changes to the tax code since 1986. The Greater Milwaukee Foundation has been paying close attention to those changes, especially those which will likely impact charitable giving. We now know that the standard deduction for taxpayers roughly doubled, which will substantially reduce the number of taxpayers who have sufficient deductions to itemize. (And if you can’t itemize, you will not receive a tax benefit from making a charitable contribution.) So we thought it might be helpful to offer some ideas to consider in your 2018 giving.

What changes were made that potentially impact charitable giving?

• The standard deduction for 2018 is $24,000 for taxpayers filing joint returns and $12,000 for individual filers. For 2017, the amounts were $12,700 and $6,350, respectively. This increase in the standard deduction, coupled with significant limitations on the deductibility of state and local taxes (including income, sales and real estate taxes) and the elimination of certain other deductions, will substantially reduce the number of taxpayers who have sufficient deductions to itemize. Taxpayers who take the standard deduction, instead of itemizing, are unable to deduct their charitable contributions.
• The maximum deduction for a gift of cash increased from 50% to 60% of adjusted gross income.

Are there ideas to keep in mind as I consider my charitable giving for 2018?

• Bunch Charitable Gifts: Your goal in doing this is to make several years’ worth of gifts in one year so your total gifts are above the standard deduction threshold ($12,000 or $24,000) in order to deduct the charitable gifts (and therefore get a tax benefit). By making a multi-year charitable gift to an organization in one year, you may have enough deductions to get above the standard deduction threshold and deduct your charitable gifts. Of course, you need to have the resources to do this and you should communicate with the nonprofit to ensure it understands that your gift is for two (or more) years of annual gifts. In future years, you make no charitable gifts and take the standard deduction on your income tax return.
• Establish a Donor Advised Fund: A donor advised fund is a component fund established within the Foundation that allows you to maintain maximum flexibility in your future giving. It allows you to make a large, tax-deductible gift in one year, but decide in the future—a few days, a year, or longer—when and how to distribute that gift. The money stays with the donor advised fund, which invests it, until you instruct the fund to disburse the money to the charity of your choice. This means that you can still give to your favorite charity on the schedule that you determine- the only difference is that the gift is coming from your donor advised fund.
• Make a Charitable Gift from your IRA: If you are age 70½ or older, you are required to take a minimum amount from your traditional IRA annually, even if you don’t need it. When you take the funds, you must include that amount on your income tax return as ordinary income. Instead, you can direct your traditional IRA administrator to make a distribution directly to qualifying nonprofits of any amount up to a total of $100,000 per year. As long as the payment is made directly to the nonprofit, the transferred amount is excluded from your taxable income (and therefore has the same impact as a deduction). A word of caution: this only works if the distribution to the charity is made directly by the IRA administrator, and donor advised funds do not qualify for this benefit. The Foundation has several other options for your gift, including designated funds to specific organizations and field of interest funds to such broad causes as education and basic needs.
• Donate Appreciated Securities. If you donate appreciated securities held for more than one year to a donor advised fund or qualifying nonprofit like the Foundation, their value for computing your charitable deduction is the fair market value on the date of the gift, and any appreciation in the securities is NOT subject to capital gains taxes. Even if you do not itemize in that year, or the deduction is limited for other reasons based on your adjusted gross income in that year, you still avoid the capital gains taxes on the built-in gain. You have to donate securities, however, not the cash proceeds from the sale of securities, to avoid the capital gains taxes.

And of course…Please check with your tax adviser as to how these tax law changes and possible strategies affect your personal tax situation.

We know that for most of you, your charitable giving is much more deeply connected to causes and the personal joy of generosity rather than income taxes. But while taxes are not the driving force in your charitable giving, they should be a consideration as you seek the greatest return on your investment. We are here to be a resource for all things charitable. If you need further clarity, please contact Mary Cook Lamensky at 414-272-5805 or mclamensky@greatermilwaukeefoundation.org.