By: Principal Scott Middelton, CFA, CIMA® and Principal Sloan Smith, CAIA, MBA, CPWA®
Charitable giving has become an important part of wealth management considering it offers not only substantial tax benefits, but also the ability to support nonprofit organizations. However, when making a charitable contribution it is important to understand whether the taxpayer is able to deduct the fair market value or basis of the property or security, the limitations of itemizing their deductions on Schedule A, and the deductibility percentage limits of Adjustable Gross Income (AGI). It is also essential to know whether giving directly to a public charity or using a donor advised fund is more advantageous.
Innovest strongly recommends touching base with a professional tax advisor before implementing any of these strategies. However, the following guidelines could be helpful as you plan for your charitable giving before year end.
Public Charity Deductibility
1. Cash Contributions – the fair market value of the cash may be deducted
2. Long-term Capital Gain Property - the fair market value of the property may be deducted
3. Short-term Capital Gain or Ordinary Income Property – only the cost basis of gifts of appreciated property or securities to a public charity which were held for less than one year may be deducted
4. Tangible personal property – if appreciated tangible personal property (i.e. artwork) is given to public charities whose function is related to the use of the property (i.e. public art museum), the amount deductible is the fair market value of the property
Schedule A/Itemized Deduction Limitations
Many individuals who have a history of itemizing their charitable giving may have found themselves in a different situation since tax year 2017. Under the revised tax laws effective January 1, 2018, the standard deduction that can be subtracted from your taxable income without itemizing rose to $12,000 for individuals and $24,000 for married couples.
Increasing numbers of taxpayers have begun claiming the standard deduction. However, with robust charitable giving a taxpayer could exceed these limits and decide to itemize which could lead to greater tax benefits.
The major categories for itemizing deductions are:
1. Gifts to Charity
a. Cash - limited to 60% of adjusted gross income
b. Long-term Capital Gain Property – limited to 30% of adjusted gross income
c. Short-term Capital Gain or Ordinary Income Property - are limited to 50% of adjusted gross income.
d. Tangible personal property – limited to 30% of adjusted gross income
2. Medical and Dental Expenses – you are only able to deduct medical and dental expenses that are above 7.5% of your Adjusted Gross Income.
3. State and Local Taxes (SALT) – the amount that can be claimed for all state and local sales, income taxes, and property taxes combined may not exceed $10,000 ($5,000 for married taxpayers filing separately)
4. Home Mortgage Interest – you may be able to deduct your home mortgage interest. However, you are only able to deduct interest on home acquisition debts of up to $750,000 beginning in tax year 2018. Also, for tax years 2018 through 2025, there is no deduction available on the interest paid on home equity withdrawals.
Some tax advisors have recommended that charitably inclined individuals consider a new strategy called “bunching” when planning their donations. For example, every other year the donors may wish to contribute to charities an amount equal to two years’ worth of donations. In these tax years when they have double-contributed, the donors may be able to itemize their deductions when filing their tax return. In the off years, the donors would claim the standard deduction on their tax return.
Some donors using the bunching strategy may find it helpful to make their charitable gifts to a donor advised fund (DAF) in their double-giving years. A donor-advised fund (DAF) is a philanthropic vehicle established at a public charity, which allows donors to make charitable contributions and then recommend grants from the fund to non-profit organizations over time, such as over more than one calendar year.
Donor advised funds provide the opportunity to include other family members in their giving decisions and make their gifts anonymously if they prefer. Many families may consider a DAF as a viable alternative to establishing a family foundation because of a DAF’s advantages of minimizing set-up cost, ongoing fees and annual reporting. Unlike a private foundation, you are not responsible for minimum distributions from a DAF or filing annual tax returns on the DAF account.
Some of the larger national DAFs are overseen by Fidelity, Vanguard, and Schwab. National and local organizations not connected with financial institutions also administer donor-advised funds, such as the National Christian Foundation.
Before establishing a DAF, be sure to consider their advantages and disadvantages, and importantly, obtain professional tax advice customized for your personal circumstances. The same diligence applies when deciding among DAF providers, including investment minimums, administrative fees, investment costs, and investment vehicles.
There is an old saying that taxes can be simple or fair, but not both. As long as politicians have the discretion to change tax legislation and avoid simplicity, it seems inevitable that tax laws will become increasingly complex. Because each person’s circumstances are unique, it is essential to seek out customized advice from a professional tax advisor before making changes to your charitable giving. The benefits can accrue to not only the charities you support, but to your personal income tax bill as well.