Tax Incentives for Donors

 

Filing personal income taxes is just around the corner. Now is a great time to consider new giving strategies to help donors make the most of their philanthropic efforts.

Take a look at the Tax Cuts and Jobs Act (TCJA). While many charitable organizations are concerned that it will reduce donations, the opposite may well be true — especially if solicitations are crafted to show donors the upside in capitalizing on their deductions.

TCJA increases the standard deduction to $12,000 for an individual and $24,000 for a married couple filing jointly. Some charities are concerned about the possibility that donors motivated by tax breaks will no longer need to itemize their contributions and therefore may donate less.

“We find that the law will reduce charitable giving by $17.2 billion in 2018 according to a static model and $16.3 billion assuming a modest boost to growth,” says the American Enterprise Institute, a public policy think tank. “Four-fifths of this decline is driven by an increase in the number of taxpayers who claim the standard deduction.”

Kiplinger agrees: “The Council on Foundations estimates that the new rules will decrease charitable giving in the U.S. by $16 billion to $24 billion annually (total giving was $390 billion in 2016, according to Giving USA),” according to “Charitable Giving Under the New Tax Law.”

The Internal Revenue Service reports that, historically, only about 30% of taxpayers have itemized. When considering the effects of the TCJA, the IRS believes that fewer than 10% of taxpayers will continue to do so.

“It can also be argued that higher standard deductions will provide new non-itemizers with more discretionary income from which most small charitable gifts are made,” says WealthManagement.com in “How Will Tax Reform Really Impact Charitable Giving?

PBS concurs, “Contributions from individuals, as opposed to corporations or other organizations, make up more than three-quarters of all donations in the United States,” according to an article on PBS.org. “It is important to note that most people aren’t solely motivated to give by saving money on taxes. About 56% of American households donated in 2015, the most recent year for which data is available, but only a third itemized their taxes. That means for at least a fourth of Americans, tax benefits are not the reason they donate.”

Even if tax incentives don’t factor into your donors’ contributions at all, helping them to make some strategy adjustments can lead to a bigger impact on your cause. Some recommendations to suggest to your donors include:

  • Name a charity as the beneficiary of an IRA, suggests Kiplinger. Heirs and the estate will avoid paying income taxes on the assets, and the charity will receive the full value.
  • Donate highly appreciated assets, such as stock, says Forbes. The donor avoids owing capital gains tax on the appreciation and can claim the full value of the assets as a charitable contribution. If made to fund an income-returning gift (a charitable gift annuity or charitable remainder trust), recognition of the capital gain is postponed and typically paid in smaller amounts over a period of years.
  • Adds Forbes: “Donors having the flexibility to time the payment of qualifying deductible expenses may want to consider bunching or bundling charitable gifts into alternate years. This may increase the likelihood of being able to itemize deductions in alternate years and reap better deductions.”
  • Forbes also recommends suggesting that donors aged 70½ or older and required to take minimum distributions from their retirement accounts request that the plan administrator make a distribution directly from their account to a qualified charity. If done correctly, the income won’t be added to taxable income, but the donor won’t receive a charitable contribution deduction. Although it’s a wash for the donor, the charity receives a nice contribution.
  • “Consider opening and contributing to a donor-advised fund (DAF) account, which allows you to contribute cash, appreciated assets or investments that have been held for at least a year,” recommends Charles Schwab & Co. in “How Can I Maximize the Tax Benefits of Charitable Giving?” This special-purpose charitable account enables the donor to take one large current-year tax deduction, if s/he itemizes, and potentially avoids paying capital gains tax on the sale of the appreciated assets. The funds can be invested for potential growth, and then granted to charities over time.