Broker Check


Americans are among the most generous people in the world and this is reflected in their significant charitable contributions. There is an additional impetus since individuals can take advantage of favorable tax benefits if these contributions are properly designed. The result of recent tax legislation is the need for careful planning to maximize these benefits.

The Tax Cuts and Job Act of 2017 significantly altered the use and benefits of itemized deductions including charitable contributions. The increase of the standard deduction to $12,000 per taxpayer ($24,000 per couple) eliminated the need for many taxpayers to itemize deductions. As a result, the impact of the three main deductions, mortgage interest, charitable contributions and state and local taxes (SALT), have all been reduced.

The percentage of adjusted gross income (AGI) that may deduct charitable contributions is dependent upon two factors – the type of charitable organization and the type of asset donated. Donations to public charities as well as private operating foundations and certain private foundations may allow a taxpayer to deduct a maximum 60% of AGI. This percentage is halved to 30% for private foundations not qualifying at 60%. Furthermore, careful consideration is required when deciding what type of asset is to be donated. The deduction on cash donations is 60% but reduced to 30% on appreciated property such as stocks and real estate and 20% to private foundations.

With the likelihood that most taxpayers will benefit more from the higher standard deduction and not itemization, it may make sense to “bunch” several years of charitable contributions in one year rather than making annual donations. The determining factor is whether an accelerated charitable contribution along with other itemized deductions exceeds the standard deduction in a particular tax year.

Perhaps the most popular vehicle that is used to make charitable contributions are donor advised funds. The taxpayer is eligible to take an immediate deduction for the contribution and the funds grow tax-free. The account can be named for the donor such as the Smith Family Fund and distributions from the fund can be made any time to a qualified charity by the donor.

The attractive features of these funds are the simplified recordkeeping and support of legacy planning. However, donors should understand that contributions to a donor advised fund are irrevocable and must be invested in a proprietary strategy offered by the firm sponsoring the fund. Generally, there is an annual administrative charge of .6%.

For those individuals who either do not need the tax deduction nor wish to make a donation from after tax assets, there is another option. Many taxpayers who are subject to a required minimum distribution (RMD) on their IRA have no need for the income. The current law allows an owner of an IRA who is age 70½ and thus subject to a required minimum distribution, to contribute a maximum of $100,000 to a qualified charity. If the spouse also has an RMD, they, too, can contribute $100,000. Please note that this $100,000 cap can exceed the taxpayer’s actual RMD. While there is no tax deduction for the contribution, the distribution is not taxable to the taxpayer. In order to qualify for this tax break, the contribution must be transferred directly from the IRA custodian to the charity. Finally, this transfer can only be taken from an IRA and not a 401(k) plan.

While the landscape for charitable contributions has changed, taxpayers continue to have the opportunity to direct donations to favorite charities while deriving tax benefits. Calculations should carefully be examined to confirm that this transaction is mutually beneficial.

Enjoy the remainder of the summer.