Are you someone who gives regularly to charitable causes but are flummoxed by the changes in personal financial planning in the past couple of years? Or, are you someone who gives regularly but wondering how to have a greater impact on one or more organizations you support?
One of the biggest impacts to charitable giving in the past few years was the Tax Cuts and Jobs Act (TCJA) passed in late 2017. By raising the standard deduction to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly and surviving spouses, many people saw their tax returns simplified, yet the need or ability to itemize charitable deductions went away.
According to IRS data as of July 2019, approximately 12.1 million tax payers have itemized deductions for charitable contributions thus far, compared to 33.6 million in 2018. The total dollar figure in charitable contributions was approximately $102B as of July 2019, compared to $160B in July 2018.
At a glance, you might wonder if fewer people gave to charity in 2018 once it no longer made sense to itemize. However, the annual Giving USA report noted that total charitable contributions were $427.71 Billion in 2018 with $292.09 billion given by individuals. While the report noted that personal giving declined slightly in 2018 by 3.4%, they noted that foundation giving increased slightly by 4.7%. While it’s tough to know what is happening at the detailed tax filing level, we might wonder if some of the decline in individual-giving and the increase in foundations is due to an overall rise in donor-advised funds.
What is a donor-advised fund and why do I care, you might ask? Started in the 1930’s, the IRS definition of a donor-advised fund is “…. a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization.” As a donor, when you make a contribution to the DAF, the sponsoring organization has legal control over it. You can retain advisory status over the investments in the account as well as how and to whom those funds are distributed. DAFs didn’t gain traction until the 1990s when several organizations, notably Fidelity Charitable, became sponsoring organizations. Today, DAFs account for $72.35 billion in charitable assets in 2018, up from $33.53 billion in 2014 according to National Philanthropic Trust’s report.
So now for the why should I care part. More individual donors are discovering DAFs as a way to “give now, grant later” as East Bay Community Foundation outlines in their literature for donors. As a donor, you simply make a donation to a DAF for the current tax year and then you grant to a charity at some point in the future. Before the 2017 tax reform, many donors were using DAFs when they had a larger income boost or had a liquidity event such as the sale of a business, real estate or a large grant of stock in a particular year. By transferring the stock, portion of the business or making a large donation to the DAF, the donor receives a deduction in that given tax year. Beginning in 2018 after the TCJA passed, donors realized they could “bunch”their donations together in order to itemize in alternating tax years as mentioned by Richard Pon, CPA, CFP and Tax Expert.
So how can you be strategic about your charitable giving strategy? As a financial advisor, I love the idea of planning and budgeting for important milestones: retirement, college savings, estate gifts and charitable giving. To understand how one might plan and budget for charitable giving, let’s look at 2 case studies:
Case Study 1 – Donation of Appreciated Stock
Casey and Chris are a married couple who have an unexpected bump in income during the 2018 tax year. Chris switched jobs in February of 2018 and received a major sign-on bonus of $100,000. Chris played it smart and waited to resign until the prior company paid the semi-annual bonus of $100,000 on January 30th. In addition, Casey’s first of a series of stock grants vested this year and the stock is trading at an all-time high. After the couple visited their CPA for some tax planning in the fall of 2018, they decided to donate a large portion of Casey’s stock to a DAF before the deadline on 12/31/2018. The donation was large enough to allow them to itemize the charitable contribution on their tax return when they filed it in 2019 and it helped to offset the spike income from Chris’s bonuses.
What was the best bonus of all for Chris and Casey? They had time and support later the next year to develop a giving strategy that worked best for them. With the help of a philanthropic advisor at their local community foundation, they were able to give in a meaningful way to causes they cared about.
Case Study 2 – Bunching donations
Jordan has been giving annually to both a high school and college alma mater. In addition, Jordan sits on the board of a local nonprofit and has been giving regularly there as well. With the tax law changes, Jordan realized there wasn’t going to be a deduction on that year’s tax return. Jordan decided to create a philanthropy budget for the next 2-3 years in order to bunch the donations into the current tax year and take the deductions. Jordan’s philanthropy budget looked like this:
Jordan’s Donation Breakdown by Organization
Jordan also had appreciated stock in a savings account that had increased over the past several years. After doing some tax planning with a CPA, Jordan donated approximately $30,000 worth of appreciated stock to a DAF at the local community foundation. This stock would then be sold by the community foundation and placed in a DAF that Jordan could use to grant out to various charitable organizations over the next 2-3 years. However, Jordan was able to bunch the tax effect of the donation in that tax year and itemize on the tax return.
As mentioned above, once the donor makes the donation into the DAF, the sponsoring organization (in this case the community foundation) now has legal control over it. During the process of making the gift, Jordan worked closely with the staff at the community foundation to understand the grant-making process, minimum amounts per grant and even learned about new causes in the community which could be targets for future gifts.
So now that you’ve learned about DAFs, what steps might you take to do some philanthropic planning of your own?
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