Under Trump, Charitable Contributions From Your IRA are More Valuable Than Ever
Tax deductions for charitable giving can be a great sweetener when it comes to reducing the bitter taste of paying taxes. But recent changes in the tax law have many convinced that we are looking at the death of charitable giving. Despite what news sources such as the LA Times and Washington Post have led the public to believe, I am not convinced that Trump’s tax reform is going to spell the demise of charitable giving. I do, however, believe that these circumstances present an opportunity to be smarter and take a more thoughtful approach in how you make charitable gifts. And, I believe that strategies like the qualified charitable distribution are more valuable than ever.
Will Givers Stop Giving?
The recent changes in the tax code, on paper, would seem to provide a disincentive for certain people to give to charity. While the charitable deduction is still available, the hurdle to take a deduction is higher due to the newly increased standard deduction. Additionally, the newly decreased individual tax rates essentially reduce the federal subsidy for giving (Tax Policy Center, n.d.). Lastly, with estate tax exemptions having been generously doubled to north of $22 million for a married couple, some highly affluent households may not be as motivated to give.
In summary, people who previously itemized their donations may find it harder or less compelling to do so under the new tax law. In addition, lower estate and marginal taxes make the tax benefits of giving seem less urgent.
While the recent tax reform does not particularly encourage or incentivize charitable giving, it doesn’t mean that charitable giving will come to a screeching halt. It’s important to remember that many of the provisions in the tax reform are temporary, and will sunset in 2025 unless extended by Congress.
Taxes are a consideration in giving, but in most cases, not the primary consideration. People give because they want to make a difference, and to support the causes that mean the most to them. According to Charity Navigator, religious groups were the largest recipient of donations in 2016 (as per Giving USA 2017, n.d.). Will people stop giving to their churches en masse because of a reduced tax incentive? I suppose it’s possible. But it’s not probable.
In fact, according to a study by US Trust and Indiana University’s Lilly Family School of Philanthropy, high net worth individuals primarily give because they believe in the cause, see the impact their gift can make, or derive a sense of fulfillment from giving. A little over half of high net worth donors said the tax break is “sometimes” a motivation, while only 18% said that it always is. (2016)
Those who having giving in their hearts will continue to contribute. To keep the sweeteners, it may just require a more thoughtful and informed strategy such as donating IRA assets to charity!
5 Ways to Make Smarter Charitable Contributions This Year
#1 Stop Writing Checks!
When people think of making a donation they naturally picture themselves writing a check. They forget or may not know that that there are tax benefits for making a qualified charitable distribution from their IRA accounts. This is possibly the most effective and yet most under-utilized strategy that you can take advantage of to support your favorite charities and reduce your taxable income at the same time.
A Qualified Charitable Donation, or QCD, is taken directly from your IRA. A QCD can be used to satisfy your required minimum distribution (RMD) for those over the age of 701/2, as that is the age when you are required to start taking RMDs.
By directing those dollars directly to charity, you avoid being taxed on those dollars, thereby diverting additional taxable income. This can be valuable because if you take receipt of the distribution—which is taxable income—and then make a donation, you won’t be receiving any additional tax breaks if you aren’t able to itemize, and you just increased your taxable income.
It is important to work with your advisor so that you don’t inadvertently take the income and then miss your opportunity to make the most of a QCD. Now is the time to see if this strategy makes sense for you.
#2 “Pre-fund” contributions
Those who don’t qualify for a QCD (as mentioned above) might consider other options such as “pre-funding”, or giving the equivalent of several years’ worth or more of donations. This strategy allows you to make a larger gift in a single tax year than you would normally make in order to exceed the standard deduction. You can make this contribution outright to your selected charities, or you can consider doing it in conjunction with strategy #3.
#3 Be advised (donor-advised)
Instead of making a large outright gift to one or more charitable organizations, consider the use of a donor-advised fund (DAF). This vehicle gives you the ability to direct when those dollars are distributed as well as to whom. This gives you more control and the ability to spread out your giving as opposed to giving it outright to a single organization.
Work with your advisors to identify how much to fund, and which assets to transfer to the DAF.
#4 Use your portfolio
Whether you are bundling gifts outright to charity or establishing a DAF, evaluate your portfolio to identify appreciated assets. Gifting with appreciated assets makes these strategies even more impactful as it effectively removes the unrealized gain and subsequent tax consequences because those gains are handed off along with your gift.
#5 Talk to your advisors to determine what the smartest move is for you.
When using any of these strategies, you probably don’t want to go it alone. There are many considerations that you’ll want to take into account. But if you are willing to take a slightly different approach to your charitable giving, you may find that you may even come out ahead!
Summary on Making Charitable Contributions from your IRA
Don’t be discouraged by recent legislation. Some strategies like the qualified charitable distributions aren’t for everybody, but for those who do qualify, it can be a very smart move.
For more information about if you qualify to make IRA qualified charitable distributions or to discuss which strategy that may make sense for you, email Karen.coyne@raymondjames.com.
Sources
Charity Navigator. (n.d.). Giving Statistics. Retrieved from https://www.charitynavigator.org/index.cfm?bay=content.view&cpid=42
Tax Policy Center. (n.d.) Briefing Book: Key Elements of the US Tax System. How might tax reforms reduce incentives for charitable giving? Retrieved from http://www.taxpolicycenter.org/briefing-book/how-might-tax-reforms-reduce-incentives-charitable-giving
US Trust and Indiana University’s Lilly Family School of Philanthropy. (October 2016). The 2016 U.S. Trust® Study of High Net Worth Philanthropy. Charitable Practices and Preferences of Wealthy Households. Bank of America Corporation. Retrieved from http://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_ARMCGDN7_oct_2017.pdf.
Any opinions are those of Karen Coyne and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is complete or accurate. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ AND CFP® in the U.S. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
