As we enter the final quarter of 2018 it’s time to think about year-end tax planning and for those who are charitably minded plan for year-end contributions to your favorite charities.
Last month I discussed the concept of bunching your charitable gifts in light of the doubling of the standard deduction under the new tax laws, and how utilizing a donor advised fund can be a valuable tool. Let’s explore two other tools that can assist you to enhance your charitable giving in a tax-wise manner under the new tax laws.
A provision of the new tax law that was maintained is very positive for charitable giving, making qualified charitable distributions (QCDs) directly from your IRA to your favorite charities. If you are 70 1/2 or older and have required minimum distributions (RMDs) that you must take from your IRA, making a QCD from your IRA to your favorite charity is a tax-wise way to make a gift.
If you have an IRA, now is the time to be looking at this year’s RMD, which increases each year. Distributions of up to $100,000 may be made each year to charities and the amount will count toward your RMD but will not be recognized as income on your tax return. Not having to recognize this portion of your RMD as income may result in you paying less in taxes on your social security income.
The distribution must come directly from your IRA custodian to the charity. Contact your IRA custodian about its process, which is often simply completing an online form. We have a number of Community Foundation fundholders who add to their scholarship or designated funds using this tool. Unfortunately, the new tax law still does not allow QCDs to donor advised funds.
Making charitable contributions through a gift of appreciated securities is the second tool you should consider. With the current strong stock market, a donation of long-term appreciated securities continues to be one of the most tax advantageous ways to give. By transferring the securities to a charity, you avoid the capital gain and also get the charitable deduction for the contribution. Stocks in your portfolio with the largest capital gain are the best to donate.
Let’s look at an example of someone who has stocks valued at $10,000 that have a cost basis of $4,000. If you sold these stocks so you could support your favorite charity, you may have only $8,500 left to give to your favorite charity after paying capital gain, Missouri state and Medicare taxes. If you donated these stocks directly to the charity, then the charity would receive the full $10,000 and you will have a tax savings of $3,800. This is $2,000 more in tax savings than you would have received by selling the stock and donating the balance, and receiving a charitable deduction for the $8,500 cash contribution. So the charity receives more, and you save more in taxes.
Under the new tax laws, if you cannot deduct the full amount in the year of the gift, the balance can still be carried forward for five years. The deduction on appreciated securities was maintained at 30 percent of adjusted gross income.
And there is even more good news with the new tax laws for charitable giving from higher income taxpayers. The Pease limitations that reduced the itemized deductions of higher income earners were repealed. So those higher income charitable givers are not taking a haircut on their deductions like under previous tax law.
With a little planning now you can enhance your support of your favorite charities and lower your tax bill. That’s worth giving a little thought to as we finally seem to be getting some nice fall weather.
– Phil Hanson is president and CEO of the Truman Heartland Community Foundation, based in Independence.