Money & Policy

Tax-Smart Charitable Giving for #GivingTuesday

Itemizing deductions is harder, so consider these tax moves

For the past several years, I’ve made an annual credit-card donation to a particular charity. This year, I waited until #GivingTuesday — that’s today, Dec. 3, when charities encourage people to donate online. I held off because I knew that on #GivingTuesday, the charity would be able to match my donation several times over. What I probably won’t get this year, however, is a tax deduction from Uncle Sam. And odds are, you won’t be able to claim a charity write-off for 2019, either.

That’s because the massive tax law of 2017 upended the ability of many Americans to deduct charitable contributions by sharply raising the standard deduction. For 2019 tax returns, the standard deduction is $24,400 for married couples and $12,200 for singles; that’s about double what the amounts were before the law changed.

Why It’s Harder to Claim Charitable Deductions

So, for many people, it simply isn’t worth itemizing deductions each year anymore, including charitable giving, because they’d get a bigger break with the generous standard deduction. The Tax Foundation estimates that 14% of taxpayers will itemize deductions on their 2019 returns, versus 31% who would’ve under the previous tax rules. And The Urban-Brookings Tax Policy Center estimated that 21 million taxpayers would stop claiming charitable deductions due to the 2017 law. The tax changes are one likely reason why charitable contributions from individuals fell by 1.1% in 2018 (down 3.4% after adjusting for inflation), according to the Giving USA 2019 report from the Giving Institute.

The most striking shift in giving is the soaring popularity of donor-advised funds, which are like tax-advantaged charity brokerage accounts.

But there are a few tax-smart ways to give to charities before year-end, and I’ll tell you about a few of them.

The 2017 tax law is causing quite a few taxpayers to rethink the way they make charitable donations, especially affluent ones. Fidelity Charitable found that half of the 475 affluent and high-net worth charitable donors it surveyed (who itemized two of the last three years) had made at least one change in their charitable giving strategy, thanks to the new tax law.

A Year for Bunching Deductions

The most striking shift in giving is the soaring popularity of donor-advised funds, which are like tax-advantaged charity brokerage accounts. These funds offer the technique of “bunching,” or combining several years’ worth of donations of cash or appreciated assets, like stocks or mutual funds, into a single year. Then, the donors get a tax deduction in one of those years because the amount of their contribution exceeds the standard deduction. But they don’t actually have to say which charities should get their contributions — known as donor-advised fund grants — until subsequent years.

“People are motivated to give,” says Eileen Heisman, chief executive officer of National Philanthropic Trust, a major grantmaking organization. “They are using a different strategy to do that. So, every two to three years, they will be bunching.”

Donor-advised funds emerged in the 1930s, but they were turbocharged in recent decades with financial services behemoths establishing their own versions. Fidelity Charitable Gift Fund, Schwab Charitable and Vanguard Charitable Endowment Program now rank among the largest donor-advised funds in the country.

Donor-advised funds accounted for 12.7% of total individual giving in 2018, up from 4.4% in 2010, according to calculations by National Philanthropic Trust.

When you set up a donor-advised fund account, the earnings on your contribution compound over time, depending on the investment choices. Record keeping is easy. All of this is why Ramsay H. Slugg, managing director and wealth strategist in Bank of America’s chief investment office, says: “We’ll see more and more of bunching.”

Donating Appreciated Investments to Charity

Another tax break for donating appreciated stock, mutual funds and other assets to a donor-advised fund or directly to a charity: When you give appreciated stock or a mutual fund that’s grown in value, you can deduct the full market value at the time (assuming you’re over the standard deduction). You don’t pay capital taxes on the gain, either, as long as you’ve owned the asset for more than a year.

A note of caution: Before donating stock or a mutual fund to a charity, be sure the organization has the financial infrastructure to accept such assets. The sooner you do this the better, since complicated tax strategies can take time and need to be finalized by December 31 to be effective for 2019.

“Think about it now and not in three weeks,” says Lawson Bader, chief executive officer of the leading DonorsTrust, a donor-advised fund. Adds Sheryl Morrison, an estate and wealth planning expert at Gray, Plant, Mooty in Minneapolis: “Any gift of more complex assets requires more resources and analysis.”

How to Make Qualified Charitable Distributions

If you’re 70 ½ or older, there’s another charity tax break you’ll want to know. It’s known as an Individual Retirement Account (IRA) qualified charitable distribution or a QCD.

Normally, if you take money out of your IRA and then give the money to charity, you’d owe ordinary income taxes on the withdrawal before donating the remainder. But with a QCD to a charity, the entire IRA withdrawal goes to the group and you don’t owe any income tax. The maximum gift is $100,000 and the donated sum counts against your annual required minimum distribution.

If you want to make a qualified charitable distribution, be sure you send the money directly to the charity. It can’t go into a donor-advised fund.

A QCD “is a great idea,” says Morrison. Ramsay Slugg notes that the “larger someone’s IRA, the less they probably need it since they usually have other assets for income. So, it’s a great way to do charitable giving.”

People with required minimum distributions from IRAs who don’t need that money “can find qualified charitable distributions a great way to manage their tax liability,” Marcy Keckler, vice president for financial advice strategy at Ameriprise, told my Next Avenue colleague Richard Eisenberg.

Giving to Charities for Non-Tax Reasons

Of course, many Americans give to charities for reasons other than taxes.

Low-income Americans, in particular, have long given a higher percentage of their total income to charity than wealthier itemizers — typically to religious institutions.

More than 63 million Americans volunteer their time each year, too, and their efforts have an estimated economic value of more than $203 billion, calculates the Independent Sector.

The bottom line: There is no shortage of worthwhile causes to support. Be thoughtful in your giving. But take advantage of the opportunity if the tax code offers an option that helps your philanthropic dollars go farther.

Chris Farrell
By Chris Farrell
Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author
 of the books Purpose and a Paycheck:  Finding Meaning, Money and Happiness in the Second Half of Life and Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life.@cfarrellecon

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