Insurance & Financial Services Group

CONNECT

Address:

12012 South Shore Blvd. Suite 108
Wellington, FL 33414

Phone:

561 798-5678

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561 798-5699

Charitable Giving Education

 

How does the New Tax laws effect Charitable Giving?

 

Based on my research, here's what I found. There some major changes in the tax rates. There are some people that may be negatively impacted, but there are planning strategies that people may use to alleviate some of the adverse effects.  But, the good news is that the majority of taxpayers should see a reduction in their tax bill for 2018.   

Some have gone down and the tax brackets themselves have shifted. This means:

  • More income is going to be taxed at lower rates.
  • The standard deduction has been significantly increased.
  • Itemized deductions have been limited or eliminated.

Due to changes in the itemized deductions, there is growing interest in charitable deductions. This is especially of interest to those high income earners who do not wish to have the IRS as their primary beneficiary, which has the potential to be half of their earnings.

Typically people view tax savings as a secondary incentive to give. The primary motive being a personal belief or passion for their philanthropic mission. Some people feel it is important to give back to society, and others who want to leave a legacy.  Whatever the motive driving the giving, it's important to have a plan in place for high income years.  

Even with new limits placed on deductions, there are still going to be people who  will benefit by itemizing their deductions and also positive changes that many people may take advantage of. There used to be a 3% overall limitation on itemized deductions, the limitation is now removed. Another advantage is that donors are now allowed to deduct cash contributions of up to 60% of their adjusted gross income (AGI), which is an increase from the past AGI of 50%.  

For those people who are on the on the boarder of itemization or standard deduction there are some strategies that may be helpful  for both tax savings, and increase charitable giving in a given year. This is known as “skip year giving.”

An example: Joe was itemizing and giving $10,000 per year to his favorite charity and then made a change.

Past giving pattern

Year 1 - $10,000 (itemize)   Year 2 - $10,000 (itemize)  Year 3 - $10,000 (itemize)  Year 4- $10,000 (itemize)

New strategy

Year 1 - $20,000  (itemize)  Year 2 - $0  (standard)         Year 3 - $20,000 (itemize)  Year 4- $0  (standard)      

This strategy, in combination of other itemized deductions (like property or state taxes) may lower the overall tax bill for that 2 year period. Where suitabile, we believe one of the easiest and effective ways to do this is by utilizing a Donor Advised Fund (DAF). Individuals can contribute a large amount into a donor-advised fund in one year and then they can grant it out to a charity or several charities over time.    

Using a DAF is also a good way to donate appreciated investments and assets. Donors do not have to pay capital gains tax when a public charity sells them. If the individual donor sells an appreciated asset themselves, they will have to pay capital gains tax. When after tax dollars are used, more goes to the IRS, while decreasing the amount given to the charity.

Today, with the new tax law now in place, a charity is one of the more valuable deductions because it's unlimited, and no longer being capped.  Combine this with the ease of setting up and utilizing a Donor advised fund and you have a winning combination!

 

Highlights:

  1. Evaluate with your tax advisor if it is the most beneficial for you to itemize or take the standard deduction.
  2. Consider the skip a year giving strategy mentioned above.
  3. Consider donating appreciated assets (over 12 months old) stock, mutual funds, real estate, prior to the sale, for maximum tax savings, and then passing it on to your charity.
  4. Set up a Donor Advised Fund with a lump sum contribution and grant it out over time.

     

Before making any tax related decisions, you should consult your Tax professional. Your financial professional can guide you in formulating  a giving plan that meets your financial objectives.

 

 

 

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