Charitable Planning
Tax-saving strategies to help offset TCJA changes affecting charitable deductions.
By Eva Stark, JD, LL.M.
The Tax Cuts and Jobs Act of 2017 eliminated many itemized deductions while simultaneously increasing the standard deduction.1 The result of the combination of these changes is that most individuals may no longer receive a tax benefit for charitable giving. This increases the importance of two tax-saving strategies that may benefit certain taxpayers: the qualified charitable distribution and the donor advised fund.
Qualified Charitable Distribution - For Individuals Age 70½ and Older
HOW IT WORKS: A qualified charitable distribution (QCD) allows individuals age 70½ and older to direct the transfer of money from their IRAs to qualifying charities, up to $100,000 annually. If all the requirements of a QCD are met, the distribution from the IRA is excluded from the donor’s gross income and also can count toward required minimum distributions from the donor’s IRA.
BENEFITS: One of the greatest benefits of the QCD is income exclusion, which can be substantially more advantageous than a charitable deduction. An income exclusion is tantamount to a 100% automatic deduction, whereas the tax benefit of a charitable deduction may be limited or precluded altogether by the increased standard deduction or limitations related to the taxpayer's adjusted gross income. A reduced gross income obtained using a QCD may additionally help reduce taxes on Social Security benefits or reduce Medicare premiums.
The table below illustrates the potential federal income tax benefit of a QCD for a couple intending to make a $20,000 charitable donation.
In order for a distribution to qualify, it must meet strict requirements, some of which include:
- The distribution must be made directly by the IRA trustee to a qualifying charitable organization (donor advised funds and certain supporting organizations and private foundations are excluded).
- The distribution must be made on or after the IRA owner attains age 70½.
- The entire donation must otherwise qualify for the charitable deduction (e.g., the donor has not received goods or services in return, etc.). Percentage limitations relating to the taxpayer's adjusted gross income are generally ignored.
- Not all IRA types are eligible (SIMPLE and SEP IRAs as well as employer-sponsored retirement plans may not be eligible in certain circumstances).
- The taxpayer cannot take a deduction for a donation that was part of a QCD.
| Potential Income Tax Benefit of a QCD | ||
| Deduction-Eligible Donation | Qualified Charitable Distribution | |
| Non-IRA taxable income | $70,000 | $70,000 |
| Intended charitable donation | $20,000 | $20,000 |
| Required minimum distribution | $30,000 | $30,000 |
| QCD | $0 | $20,000 |
| Taxable IRA distribution | $30,000 | $10,000 |
| Total income | $100,000 | $80,000 |
| Itemized deduction for gift | $20,000 | $0 |
| Other itemized deductions | $10,000 | $10,000 |
| Total itemized deductions | $30,000 | $10,000 |
| Standard deduction (65+) | $26,700 | $26,700 |
| Deduction taken | $30,000 (itemized) |
$26,700 (standard) |
| Taxable income | $70,000 | $53,300 |
Donor Advised Fund - For All Other Individuals
HOW IT WORKS:
A donor advised fund (DAF) is akin to a "charitable checking account," which is typically set up with a public charity. The donor may subsequently make recommendations for distributions from the account to benefit qualifying charities.
While the public charity is technically the owner of the funds and is not required to follow a donor's recommendations, charities are incentivized to do so in order to avoid alienating donors.
BENEFITS:
A DAF is convenient and easy to set up, and it can offer substantial flexibility for subsequent giving. The donation is immediately eligible for a charitable deduction, if requirements are met. Because contributions to a DAF can be immediately deductible, a DAF may be used to "bunch" or "accelerate" multiple years' worth of charitable gifts for a greater tax benefit. Funds in the account grow tax-free, allowing for a greater charitable distribution.
The table below illustrates the potential federal income tax benefit of utilizing a DAF for a couple who plans to donate $10,000 annually to qualifying charities.
| Potential Income Tax Benefit of Using a DAF | ||
| No Donor Advised Fund | Donor Advised Fund | |
| Income | $100,000 | $100,000 |
| Charitable donation | $10,000/year | $10,000/year |
| Other itemized deductions | $12,000/year | $12,000/year |
| Standard deduction | $24,400 | $24,400 |
| Amount contributed to DAF | $0 | $30,000 (3 years of donations) |
| Deduction taken | $24,400 (standard) |
$42,000 (itemized) |
| Taxable income | $75,600 | $58,000 |
While experts recognize that tax savings are not the chief motivator for charitable giving, QCDs and DAFs can offer important tax and other savings for those who choose to support charitable endeavors. Individuals considering these strategies should explore their specific tax circumstances with their advisors, including any state and local tax implications that may not follow federal income tax rules.
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Eva Stark, JD, LL.M.,joined The Nautilus Group® in 2014 to assist with the development of estate and business plans. She also performs advanced tax research. Eva graduated summa cum laude with a BS in economics and finance from The University of Texas at Dallas. She earned her JD, with honors, from Southern Methodist University, where she served as a student attorney and chief counsel at the SMU Federal Taxpayers Clinic. She received her LL.M. in taxation from Georgetown University Law Center. Prior to joining Nautilus, Eva worked in private practice in tax controversy, business law, and litigation. |
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