HCA Charitable Giving Strategies for 2019

Jun 17, 2019

The new tax law that went into effect last year did not make major direct changes to the laws governing charitable donations, but tangential effects of other provisions of the law have served to focus new attention on some existing charitable giving techniques. This law, informally known as the “TCJA,” doubled the standard deduction and eliminated or curtailed most itemized deductions, with the result that many fewer people itemize deductions on their tax returns than in the past. For 2019, the standard deduction is $24,400 for married couples filing jointly, $12,200 for single taxpayers and $18,350 for heads of household. The deduction for state and local taxes is now limited to $10,000. The mortgage interest deduction for mortgages obtained after December 15, 2017, is limited to interest on debt of up to $750,000, and home equity debt is no longer deductible unless it is used to buy, build or improve the home securing the debt. Medical expenses remain deductible only to the extent that they exceed 10% of adjusted gross income (AGI), and all miscellaneous deductions that were subject to the 2% of AGI cap have been eliminated. While charitable donations remain deductible for taxpayers who itemize – (in fact cash donations are now deductible up to 60%, rather than 50%, of AGI) – many people who customarily itemized find themselves taking the standard deduction instead. A married couple with no significant medical expenses or mortgage debt is likely to end up with no itemized deductions other than $10,000 of state, local, and property taxes. Under those circumstances, given the $24,400 standard deduction, the first $14,400 of charitable donations that this couple makes in a given year, while still much appreciated by the recipient charities, will not yield the couple any additional tax benefit. Although the TCJA diminishes the tax incentive to give to charity, it also leaves room for some beneficial tax planning around charitable gifts. This memorandum is an updated version of a communication we sent out to clients last year suggesting some techniques which may be helpful for those who would like to move forward with tax-wise charitable planning.

In thinking about giving to charity in the context of post-TCJA planning, the first thing to remember is that charitable giving is not primarily a tax strategy. In large part, we give to charities because we support their causes and we hope to have a positive impact in our community and the world. The organizations that we support – and the people and causes they serve – are counting on donors to continue giving despite the tax law change. Nonetheless, while for many people deductibility may not dictate whether or how much to give to charity, it may affect the method or timing of giving. Here are a few strategies to keep in mind when thinking about charitable giving in this new tax environment.

Donate appreciated securities. Donating appreciated securities to charity continues to be a useful strategy under the TCJA. A donor can give appreciated securities held for more than one year to a public charity and receive a tax deduction for the full fair market value of the securities on the date of the gift (up to 30% of AGI). Since the charity, unlike the donor, is not subject to capital gains taxes, it is able to sell the securities and realize the full sales price as the value of the gift.

Bunching. A tactic to maximize the tax benefit of charitable giving under the TCJA is to “bunch” donations, i.e., give multiple years’ worth of donations to a charity at once and then refrain from donating in subsequent years. In this way, the donor may be able to amass large enough deductions to make itemizing worthwhile in one year and then simply take the standard deduction in subsequent years. A variation on this approach is to make donations in January and then again in December of the same year, which could be less disruptive to the charity’s cash flow (and the donor’s cash flow as well) while providing the tax benefits of bunching two years’ donations into one year.

Donor-Advised Fund. Another way to accomplish the goal of bunching is by setting up a donoradvised fund or “DAF” at a public charity. This can be done through many major investment firms (including Fidelity, Vanguard, Charles Schwab and others) which have established public charities specifically for this purpose, or through a traditional charity such as a local Community Foundation that may have a DAF. The donor can donate cash, securities or other assets to the DAF, take an immediate charitable tax deduction for the entire amount, and then decide at a later date how and when the donated funds will be distributed to charities of the donor’s choice. Once the money has been donated, the sponsoring charity owns the assets but the donor, as advisor of the fund, recommends how the money should be disbursed, and the sponsoring charity will generally follow those recommendations. In the interim between donation and disbursement, the funds are invested and continue to grow tax-free in the hands of the sponsoring charity. A DAF can be a particularly good vehicle for donating appreciated securities. The DAF sponsor is not subject to capital gains tax and is more likely than small charities to be able to handle the mechanics of accepting and liquidating non-cash assets and can then efficiently distribute cash to the recommended charities. In addition to tax advantages, a DAF can serve as a family charitable vehicle without the complexity and expense of a family foundation and can enable anonymous giving if that is desired. A DAF can be set up quickly and easily, but experience has shown us that it is best to plan ahead and not wait until the last minute, particularly if you are transferring securities. If you are thinking of establishing a DAF or donating to an existing DAF this year, you should begin the process as soon as possible.

Qualified Charitable Distribution. IRA owners over age 70 ½ can use required IRA distributions to make charitable gifts through a Qualified Charitable Distribution (“QCD”), a strategy that does not provide a charitable deduction, but instead reduces taxable income. Eligible IRA owners can satisfy part or all of their required minimum distribution (RMD) requirements without recognizing taxable income by making QCDs of up to $100,000 a year from an IRA directly to public charities. The QCD must come from a traditional or inherited IRA, not an employee retirement plan. The payment must be made payable directly to the charity from the IRA; it cannot be distributed out to the IRA owner and then paid over or endorsed to the charity (although a check payable directly to the charity can be sent to the IRA owner to forward to the charity). Minimizing taxable income can have additional advantages by mitigating various tax provisions that are based on AGI (including Medicare costs and taxation of Social Security benefits) and/or keeping the donor in a lower tax bracket. One concern sometimes expressed by clients is that they have not really heard about this option before. Although this technique has existed for some time, it has become much more popular recently as people look for opportunities to lower their tax bills under a tax code that offers very limited deductions.

This memorandum is intended to provide a general summary of some strategies for charitable giving in 2019. Each of these strategies is subject to additional rules and limitations, and the suitability of any of them will depend on your individual tax situation. If you are interested in learning more about any of these strategies, we would be happy to discuss them with you and to assist you in considering them with your accountant in light of your anticipated 2019 tax picture.

Harbour Capital Advisors, LLC (“HCA”) is neither an attorney nor an accountant, and no portion of the content provided herein should be interpreted as legal, accounting, or tax advice. The tax information contained herein is general in nature and is provided for informational purposes only. HCA does not provide legal, tax, or accounting advice. HCA cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws which may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results.