Tools to Help Realize Your Year-End Charitable Giving Goals

Wealth Advisor Jada Diedrich unpacks her toolkit for building an efficient charitable giving strategy that’s designed to help maximize the way your contribution dollars benefit not only the causes you hold most dear, but also you and your family.

As we enter the holiday season, we often feel compelled to evaluate, and frequently to increase, our charitable giving. This time of year, specifically, seems geared toward reminding us that giving to others can be personally fulfilling in a multitude of ways. In many cases, our deepest values guide us to give back to our communities, contributing to the causes that we hold most dear and where we can make an impact.

Our values also guide the financial plans we make, so it is natural to incorporate our charitable giving goals into our financial framework. By working together with your tax advisors and financial advisors, you can develop an efficient giving strategy that will allow you to help maximize the way your investment dollars benefit not only you and your family, but also those charities important to you.

Several tax changes went into effect for 2018, some of which directly impact charitable giving. One positive change to note is that the tax code now allows cash gifts up to 60 percent of adjusted gross income (AGI). Previously, the limit was 50 percent. Gifts of appreciated stock are still limited to 30 percent of AGI, but contributions can be carried forward for six years if you cannot use all of the tax benefit at one time. The carry-forward rule only applies if you are itemizing deductions, meaning that if you take the standard deduction, you cannot carry over deductions. In addition, new tax laws have changed the qualifications for individuals to itemize their deductions. The standard deduction was increased, and many previously allowed itemized deductions were eliminated, which means many people may need more charitable contributions to itemize.

To help you realize the greatest benefit for the charitable contributions you make, consider the following strategies, which may be useful as you work with your advisors on year-end planning.

Load up on contributions. You may want to consider increasing your contributions to nonprofits this year, possibly alternating years you donate to organizations but increasing the amount, so that you exceed the standard deduction and maximize the tax benefit of your generosity.

Give to a donor-advised fund (DAF). Donating to a DAF allows you to take a tax deduction for contributions to the account in the current tax year, even if you don’t distribute money from the fund to charities until future years. This can be another great way to “load up” contributions in one year but retain the flexibility to distribute them to charities at a time you prefer, even over multiple years. They are also easy to use, easy for record keeping, and inexpensive to administer. DAFs can be particularly powerful if you know you will be in a much higher tax bracket in the current year than in future years, so that the charitable deduction comes at a time most advantageous to you. In addition, gifting appreciated stock to DAFs is a way to further maximize your tax benefits.

Make a Qualified Charitable Distribution (QCD). QCDs, non-taxable charitable contributions made directly from an IRA, have been around for a while, but they have increased in popularity this year due to tax law changes. While they cannot go to a DAF, QCDs can be another good strategy for those taking Required Minimum Distributions (RMDs) from retirement accounts. If the QCD is done correctly, the RMD can be excluded from income entirely. While taking a charitable deduction for it is not allowed come tax time, the QCD route can be advantageous for those who were not going to be in a position to itemize anyway because of new tax rules. Also, QCDs’ exclusion from income can be helpful in realizing other tax benefits that have AGI or taxable income limits. Medicare premiums are based on modified AGI, so making QCDs could affect the premium you pay for that coverage.

Create a charitable trust. Charitable trusts allow donors to set aside assets for one or more charities. They can be great planning tools for individuals who own appreciated stock that they would consider donating to nonprofits if they could continue to receive the income from those investments. There are various ways to structure such trusts, but they can give you flexibility and control over your charitable giving while providing income and estate tax benefits. Due to the complexities involved, you should work with your tax and financial advisor to determine if a charitable trust is a suitable option for you.

Some other items to consider moving onto your financial plan’s charitable giving to-do list before year-end may include:

Gift appreciated stock. Appreciated stock, rather than cash, can make an excellent asset to gift to charities. In addition to the tax deduction for the value of the stock you contribute, you do not have to claim the unrealized gain as income, therefore avoiding capital gains tax.

Ensure the timely completion of gifts. Make sure you complete contributions to DAFs, any QCDs, and outright gifts by Dec. 31. Custodians already are busy with an increased volume of requests as the end of the year approaches. If you wait too long, they may not be completed in time, blowing up the planning behind the strategy.

Confirm that charities cash QCD checks by the deadline. QCD checks must be cashed by the charity prior to Dec. 31 to count as a QCD in 2018. If they are not, the RMD is income for 2018 and the deduction cannot be used until 2019. It is best to contact the charity after you make the QCD so the organization can make sure to cash your check in a timely manner, and so you will understand if it is facing year-end constraints that might interfere with its ability to do so.

Drop off non-cash donations. Donate clothing, household items and old autos by the end of the year if you want them to count as charitable contributions in 2018.

Coordinate cash or credit card donations. Charitable deductions are allowed in the year they are paid. This means that, if you charge the donation on your credit card in 2018 but do not pay that credit card bill until 2019, you can still take the tax deduction in 2018. For checks other than QCD checks, the donations will count for the 2018 tax year as long as they are mailed to the charity in 2018.

As always, the strategies I’ve outlined come with limits and nuances, often depending on your unique financial and life circumstances. As a result, I recommend consulting your tax and financial advisors for guidance given your personal situation and charitable giving goals.

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