Navigating Charitable Giving

Managing finances in the face of complex tax changes can sometimes feel like attending a one-year-old’s birthday party. There’s plenty of enthusiasm and the best of intentions—but it can also get a little messy. Since the Tax Cuts and Jobs Act (TCJA) went into effect in January 2018, many taxpayers have faced a new set of challenges and opportunities in managing their financial decisions, particularly when it comes to charitable giving.

While we can’t guarantee that navigating tax changes will always be smooth sailing (just like you can’t guarantee a clean birthday party with toddlers), we’re here to provide helpful insights into the charitable giving options available to you in the current tax environment.

The TCJA brought significant shifts to the tax code, including higher standard deductions, which may impact your deductions and the ways you can optimize your charitable contributions. Here are some charitable giving insights to keep in mind:

1. Stock (Market) It to ‘Em!

If your portfolio has seen strong growth, consider donating appreciated stocks instead of cash to a charity. Not only can this allow you to make a larger contribution, but it also lets you avoid paying capital gains tax on the appreciation.

For example, if you donate $100,000 worth of stock that you originally purchased for $50,000, you can deduct the full $100,000 value as a charitable contribution—and avoid the tax liability on the $50,000 capital gain you would have incurred if you sold the stock. The general rule for deductions is that you can deduct up to 30% of your income for gifts of appreciated assets, and any unused portion of that deduction can be carried over to future years.

2. Donate Your IRA Distribution to Offset Income

If you’re age 73 or older and are required to take a minimum distribution (RMD) from your IRA, you can donate all or part of that distribution directly to a charity through a Qualified Charitable Distribution (QCD). This allows you to reduce your taxable income while also supporting a cause you care about.

A QCD helps you avoid paying taxes on the RMD, and you can donate up to $100,000 per year to qualifying charities. While you don’t get a separate tax deduction for the gift, the QCD reduces your Adjusted Gross Income (AGI), which can provide significant tax savings.

This can be particularly useful in light of the TCJA’s increase in the standard deduction, as it offers a way to make a charitable impact without needing to itemize deductions.

3. Consider a Donor-Advised Fund

With the increased standard deduction introduced by the TCJA, many taxpayers find it harder to itemize deductions and take advantage of larger charitable gifts. A donor-advised fund (DAF) is a helpful tool for making larger charitable contributions while receiving an immediate tax deduction.

By contributing to a DAF, you can make a sizable gift in one year that may push you past the standard deduction threshold, allowing you to itemize and take advantage of the tax savings. Plus, the funds in the DAF can be invested for growth, and you can decide over time which charities you’d like to support. This option allows for ongoing flexibility in how your charitable gifts are distributed.

4. Bunch Your Deductions

In response to the tax changes from the TCJA, one common insight is to “bunch” your deductions into a few years. This means you could combine multiple years’ worth of charitable contributions into one year to exceed the standard deduction and itemize. In other years, you would take the standard deduction.

For example, if you and your spouse typically donate $10,000 a year to charity but cannot itemize due to the standard deduction, you could bunch your donations into a $20,000 gift in a given year. That would allow you to itemize in that year, while in other years you simply take the standard deduction. Over time, you’ll be able to maximize your deductions while continuing to contribute meaningfully to the causes you care about.

The Bottom Line

Understanding the tax landscape post-reform can feel overwhelming at times. However, by thoughtfully navigating these changes, you can take advantage of charitable contributions in a way that best fits your financial situation. Whether you’re donating appreciated stocks, using IRA distributions, or exploring donor-advised funds, there are plenty of ways to optimize your giving while managing your tax situation. While tax reform may have shifted the rules, with careful planning, you can continue to support causes that matter to you while managing your taxes effectively.