When the new tax law was enacted last December, taxpayers had little time to act before the end of the tax year. Now is a good time to look at how the new rules may affect your charitable giving for 2018 tax-planning purposes.
The current law retains seven ordinary income tax brackets, lowering the rates and thresholds for most brackets. The tax rates for capital gains and qualified dividends are unchanged, but thresholds are slightly lower. The current law also nearly doubles the standard deductions for taxpayers who do not itemize their returns.
Although a lower potential tax liability and a higher standard deduction may reduce the tax incentive for some taxpayers to make charitable donations, you may still wish to share your generosity with favorite causes. Indeed, charitable giving by Americans increased 5.2 percent in 2017 to a record $410 billion, according to a recent report published by the Giving USA Foundation.
To make charitable gifts for both philanthropic and tax-planning purposes, consider one or more of the three following strategies.
Donor Advised Funds (DAFs)
DAFs offer an easy way to make gifts over multiple tax years for tax purposes. Throughout your lifetime, the DAF allows you to recommend which charities receive grants, how much they receive and when funds are disbursed. Plus, you can recommend how fund contributions should be invested.
Taxpayers whose 2018 charitable donations are less than the new higher standard deduction may want to consider “bunching” several years’ worth of donations into one year to qualify for some tax benefit. For example, a couple who gives $5,000 annually may want to fund a DAF with five years’ worth of contributions (i.e., $25,000) during the current tax year.
Qualified Charitable Donations (QCDs)
If you are age 70 and a half or older and are taking required minimum distributions (RMDs) from a qualified retirement account, you may transfer the amount of your RMD from your account directly to a qualified charity. The amount can be counted toward satisfying your RMD and can be excluded from your taxable income.
The maximum amount taxpayers can donate through a QCD in a calendar year is $100,000 for single taxpayers or $200,000 for taxpayers who are married and filing jointly. For a QCD to count toward your 2018 taxes, the funds must come out of your retirement account by your RMD deadline (generally December 31).
Appreciated Assets Donation
Donating appreciated assets to a DAF may be a strategic way to take advantage of tax benefits available under the current tax law. Giving appreciated assets held more than one year — such as low cost-basis stock — to qualified charities allows taxpayers to deduct the value of the asset from ordinary income without paying capital gains taxes. The gift is deductible up to 30 percent of adjusted gross income.
In the context of the new tax law (lower ordinary rates, yet substantially similar capital gains taxation), the good news is that this approach is still as important as ever for clients who wish to combine tax and charitable goals.
This article is provided by RBC Wealth Management on behalf of Pamela J. Carty, a financial advisor at RBC Wealth Management, and may not be exclusive to this publication. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.
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