This time of year offers us an opportunity to reflect on the past year’s blessings and spend time with the ones we love. It also means that we’re in the middle of the holiday season, as if it weren’t evident enough from the gifts, lights and Christmas music on the radio. The holidays also mean that the amount of cheer in the air and overall giving spirit are at their peak for the year. Now is the time of year when people are thinking about their annual, ongoing, charitable contributions. It’s the time when financial advisors typically check in with their clients about any contributions that could play a role in their tax planning.
The Tax Cuts and Jobs Act of 2017 was the largest tax reform act since 1986. Initially, there was concern about the negative impact that it could have on charitable giving, but deductions were unaffected. The standard deduction, itself, doubled, decreasing the number of taxpayers who will itemize their deductions.
However, there still is a number of ways to take advantage of the tax break and keep the holiday spirit this year. Scheduling and bunching your donations on a timeline where you’re giving every two-to-three years while keeping your annual donation amount the same is one tactic. It helps you reach your itemized deduction limit one year and use the standard deduction in the off year(s). A simple example of this would be Ron and Tammy choosing to take their $7,500 annual donation. Instead of donating every year, they choose to compound it to $15,000 every other year or $22,500 every third year.
Looking at it from a different angle, the Charitable Remainder Trust (CRT) has been around for decades and is a sometimes-underappreciated tool for avoiding estate, transfer and capital gains taxes. The CRT not only serves to avoid taxes but converts an asset into an additional stream of income. Potentially, it can help relieve a little pressure on the unknown. When interest rates rise, there are certain types of charitable trusts that will see an increase in their charitable income tax deduction. This makes the timing for a charitable tax avoidance idea more appealing.
Lastly, you may have an opportunity to leverage your IRA as a way to give back. Because IRA holders have the requirement of making withdrawals at age 70½ to meet their Required Minimum Distribution (RMD), the government will tax that withdrawal as income. However, there is also legislation in place that makes charitable donations directly from your IRA possible. Those withdrawals help meet the RMD requirements. The limit on donations from your IRA is $100,000 per year, facilitated through an IRA custodian. Some custodians make it even easier by offering the IRA holder a checkbook.
A Charitable IRA Rollover does not have to be given as a lump sum of the $100,000 limit, either. If there remains a need for income from your RMD, you can make partial gifts to one or more charities. However, if you have additional income and have the means, a Charitable IRA Rollover can be a simple way to spread your generosity. Note that IRA donations can’t be used in conjunction with a deduction on your tax return.
While the new tax act means that you may have to adjust the strategy for your charitable giving this year, it’s important not to let that curtail and distract from the importance of your generosity. In my time as an advisor, I continue to be encouraged and amazed by the generosity of others. Many who have accumulated wealth in their lives are driven to give back to their communities to help enrich the lives of others who may be less fortunate.
As an advisor, there are few things more rewarding than seeing clients passionate about their giving. Even as tax laws continue to evolve and develop, we can’t lose focus on all that these charitable organizations bring to our communities. Whether it’s through a church or other religious organization, a local animal rescue shelter, any number of cancer-focused organizations or something else altogether, these organizations help fill the gaps where there is a need in our communities.
With new tax laws impacting the way we give, it’s important to understand the rules that affect our tax planning as we think through our charitable giving. To learn more, contact your financial advisor or make an appointment to meet with one.
Walt Mozdzer, CFP, CAP, is a lead advisor for Foster Group.
