Planning for the Charitably Inclined

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The Tax Cuts and Jobs Act signed into law last Christmas and effective for 2018 presents us with a new set of planning opportunities. We have identified two cohorts of taxpayers for whom the law change can potentially provide benefits with the right planning: those who give a lot of money to charity and those who give to charity AND are subject to Required Minimum Distributions.

Our focus in this news update is on those who give cash to charity. Giving your time, talents, and non-cash contributions to charity are noble, but they are not the focus of this particular strategy.

The contribution level must also be addressed. You might give a thousand dollars or more to charity, but if that is split over 20 different organizations, our planning strategy becomes too unwieldy to be worthwhile. The strategy works best when you have a few favorite charities to which you give $1000 or more per year.

If you are subject to Required Minimum Distribution rules, you know who you are. You are the young age of 70 ½, and above, and have retirement assets. If you are charitably inclined and subject to the RMD rules it is in your best interest to utilize the Qualified Charitable Distribution rules to give money to charity. Under this strategy you give money to a Qualified Charity directly from your IRA. You will pay no tax on the distribution and the distribution will help you meet your RMD requirements.

The new standard deduction rules make it highly unlikely for people to itemize. This means if you previously itemized, took your RMD and then contributed part of it, the contributed portion was not subject to tax. Under the new rules, it will be subject to tax if you fail to meet the higher itemized deductions threshold. We can, however, avoid that taxation if we instead perform a Qualified Charitable Distribution. You need to speak with your financial advisor or IRA custodian to properly execute this type of transaction. It must be done correctly, otherwise, it will not qualify.

(Graphic illustration of sending money from IRA to Person to Charity and then bypassing the Person and sending direct from IRA to Charity)

Our next strategy is called a Donor Advised Fund (DAF). A DAF is effectively a new investment account where all the money in the account is earmarked for charity. You can setup auto contributions and send funds from the DAF just like you would your normal bank or investment account.

This type of account must be setup with an approved custodian such as Fidelity, Charles Schwab, the National Christian Foundation, etc. You receive credit for the charitable contribution when you put money in the account. Your charities of choice receive the funds when you send it to them from the account. You operate the same as before, but with a specific account from which you send all your charitable contributions.

This works best when you can pre-load the DAF with at least 1 year of donations in advance, preferably 2 or 3 years. This way we can plan on itemizing in the year the DAF is funded, and then take the standard deduction in years when there are no large DAF contributions.

Both strategies might seem exotic, but really, they are quite simple in practice. We are happy to help you execute one or both of these strategies, or assist you in executing them on your own.