Charitable Giving Strategies Under the TCJA

As we near the end of the 2019 calendar year, thoughts of year-end tax and financial planning may be on your mind. Charitable giving and tax strategies have changed for the simple reason that some taxpayers may no longer itemize their deductions due to the larger standard deduction ($12,200 for single taxpayers and $24,400 for married couples). What then, are some strategies that taxpayers might consider?

Gifting Grain

Gifting grain may be a great way to make a charitable gift vs. a cash donation. Giving a cash donation may not provide you with a tax deduction if your total itemized deductions don’t exceed the standard deduction.

By giving grain to your church or favorite charity, the cash basis farmer will exclude that gifted grain as taxable income saving not only Federal and State income tax, but self-employment taxes as well! By doing this you exclude income and take the standard deduction. This can help the charity while helping you save taxes as well. Here are some things you need to know about giving grain to charities:

1. Contact your local grain elevator or cooperative and transfer bushels of grain from your name to the name of the charity.
2. Ask the elevator or cooperative to prove a warehouse receipt to the charity (or some form of support).
3. Inform the charity that you have made this gift and provide them a contact at the elevator or cooperative so they can call and sell the grain. This is important. The charity must have 100% risk of owning the grain including storage and price fluctuation.

This is a great strategy for farmers that give every year but may not have enough to itemize.

Giving Away Your IRA Required Minimum Distribution

This strategy is another way to get a tax benefit of making a donation even though your total itemized deductions are not higher than the standard deduction. The tax law requires that in the year you turn age 70½ that you take a minimum distribution from your IRA. This is calculated based on an IRS life expectancy table and determined at the end of the calendar year. These distributions are taxable in the year you receive them. 

However, the tax law also allows these taxpayers to make a direct contribution of this required amount to charity. These Qualified Charitable Distributions (QCDs), must be made directly from the custodian of the IRA to the charity. Taxpayers are also limited to $100,000 per taxable year for the amount of QCD that may be excluded from gross income. This strategy allows for a tax benefit when the taxpayer doesn’t itemize, plus it reduces their Adjusted Gross Income (AGI). The lower AGI resulting from this strategy may lessen the effect of phaseouts and limitations on tax and other benefits, including lowering the taxable amount of Social Security benefits.  However, you cannot designate a donor advised fund as the charity. 

Contributing to a Donor-advised Fund

The concept of a donor-advised fund has been around for a long time. However, they didn’t get a lot of attention until the recent change in the tax law. Today, donations to these funds account for over 4% of all charitable giving here in the United States. These funds are a giving vehicle established at a public charity that allows donors to make a contribution, receive an immediate tax deduction and then recommend grants from the fund over time. This allows the donor to contribute to the fund to “bunch” the deduction so they can itemize their deductions, and then the funds can be distributed to the suggested charities over multiple years. There are several benefits and some drawbacks for this strategy. Benefits include making a larger contribution in one year to benefit the charities over several years while the earnings are tax free. For taxpayers that are retiring or have a high-income year, this can be a great strategy. 

Another benefit is these funds can receive highly appreciated securities easily which eliminates the capital gain for the taxpayer and creates a larger deduction for the charity. Sometimes charities have a difficult time accepting securities as a gift and these funds can help with sale and transfer in a cost-effective manner. Donor advised funds are not free from costs. Most charge an administrative fee around 1% per year on the asset base. This is in addition to any mutual fund fees that might apply. In addition, the donor can only recommend the charities to receive the gifts from the fund and cannot control the assets of the fund.

Conclusion

The Tax Cuts and Jobs Act changes to the standard deduction has changed how taxpayers benefit from charitable giving. Planning and reviewing these strategies in detail can help taxpayers get the maximum tax benefit while many other taxpayers may need to consider other options. 

These strategies can be complex and income tax planning is a comprehensive process. Therefore, it is essential to work with an advisor than can help guide the process and understand your own unique situation. If you are contemplating a charitable giving strategy or need help with year-end tax planning, Sikich tax professionals are available to work with you.