Tax Law Changes – Be Prepared for Year End

October 23, 2018

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Written By: Danny

By Danny Maier

Several months ago, the fundraising world was talking about the changes in tax law and what differences might be expected. While much of the affects will not be known until everyone is done filing taxes next year, here is a preview of what many experts are seeing already and how you might want to respond today for the benefit of your mission: Donor Advised Funds; Qualified Charitable Distributions (QCDs); and Stock Transfers.

Donor Advised Funds

With the standard deduction rising to $12,000 for an individual and $24,000 for couples, many more folks in the middle of the tax brackets will not see much*, if any, tax relief to their donation. However, clever individuals in the middle and upper income brackets are already looking to “bundle their gifts.” For example, I have one donor that typically gives away $10,000 to $15,000 annually. This year, he and his wife put away $50,000 (transferring stock to avoid capital gains) into a “donor advised fund” (such as this example); this will fund their contributions for the next three or four years at which time they plan to add more. What is their projected tax benefit of this strategy? Quite significant. So towards the end of 2018, be prepared for more contributions to come through these donor advised funds, that are typically gifts at a higher limit because many of the donor-advised groups have a $500 or higher minimum contribution.

Qualified Charitable Distribution (QCD)

If an owner of an IRA is 70 ½ year of age, they must begin to take a Required Minimum Distribution (RMD) each year from their IRA. This is considered income and is taxable. However, the tax law now allows a donor to turn that RMD into a Qualified Charitable Distribution (QCD). Starting in 2018, the tax law allows charitable donations made from tax-deferred accounts to be exempt from taxation up to $100,000 as long as the distribution comes from a qualified account and is donated directly to a charity that meets the IRS stipulations. This is now a permanent rule moving forward as of this year. That means the entire $100,000 is not taxed. In a sense, 100% tax deductible and a great option for willing donors over age 70 1/2.

Stock Transfers

This is not new nor will there be changes to stock transfers with the new tax law, however, we are seeing far more donations through direct transfer of stock or other appreciated assets — partly because the markets have risen for 12 years straight. Direct transfer of assets allows the donor to deduct the entire value of the stock or asset while also avoiding paying capital gains that may have occurred over the life of this investment.  This is quite a win-win-win for the donor in maximizing their contribution to your mission, while maximizing tax-deductibility, and avoiding capital gains on the asset.

 

Why is this important at this time of the year? Be prepared for the end of year flurry that may come your way as donors figure out the tax laws and how best to be charitable.  You might want to engage certain major donors in a conversation on how best they may fulfill a pledge. Perhaps this outline of “Ways to Give” might help you and your donors as well.

 

*Did you know? Last year, for those 68 percent of tax payers that do not itemize their taxes and take the standard deduction, there was no financial benefit to making a gift. Only 32 percent of US taxpayers itemized and only 81 percent claim a charitable gift. So only 25% of taxpayers saw any financial benefit to making a “tax-deductible” donation in previous years. In 2018, that number may be even lower.

 

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3 responses to “Tax Law Changes – Be Prepared for Year End”

  1. Doug Goodfellow says:

    Dan,

    This was both a good and timely article!!!! One question about the tax deductibility of stock. I may be living way in the past, and I have not verified this, but I thought stock transfers were only deductible up to 50% of income………not the entire value of the transferred stock.

    Thanks for all of your great insights throughout the year. Doug Goodfellow

  2. Danny Danny Maier says:

    Hi Doug,

    For stock transfers, the owner must transfer the stock/mutual fund directly to the charity. And depending on other factors, how this will affect one’s tax bill will differ. Hopefully this site will provide greater clarity: https://www.fidelitycharitable.org/giving-account/what-you-can-donate/donating-stock-to-charity.shtml

    Many thanks!

    Danny

  3. John C Alexander says:

    Thanks for the good insight and suggestions, Dan.