Optimize Your Giving

Ultimately all things belong to God. As Psalm 24:1 says, “The earth is the Lord’s, and everything in it, the world, and all who live in it.” So, the things that are Caesar’s are only his for a time.

For Christians in the United States we don’t have Caesar, we have Uncle Sam. Uncle Sam’s idea of what is his is subject to change based on a variety of factors. Some of those factors we have a great degree of influence over, others we have very little.

At the end of 2017, Congress rushed to pass the Tax Cuts and Jobs Act (TCJA), changing many things in the tax code. Many taxpayers did not understand the full implications at the time, but came to realize them in April when they filed their first tax return under the new set of rules.

There are two key broad changes that impact charitable giving: 1) The standard deduction was doubled. 2) There was a $10,000 limit put on deductibility of state and local taxes (SALT).

As a result of these two changes, many taxpayers found they were no longer itemizers. The Tax Policy Center estimates that in 2018 almost 90% of households elected the standard deduction and received no incremental tax benefit from their tithing or other charitable contributions. They believe this increased from approximately 70% prior to the TCJA.1

Now, from a biblical perspective, the presence or absence of a tax benefit should not be a material input in determining one’s generosity. But the Bible also talks a great deal about stewardship and the need to be thoughtful and careful with the resources God has given us. In the spirit of stewardship, there are some charitable planning strategies that may recoup lost benefits and help re-direct resources away from the Federal Government to other causes.

In our practice, we have worked with many charitably inclined individuals. While we found they spend time thinking about how much to give or who to give to, few of them spend energy on the most effective ways to give.

Before we get to a few potential strategies to consider, we recommend seeking the advice of a qualified tax, legal, or financial professional, as some of these have nuances and potential implementation issues that may make them more or less attractive to you and/or applicable to your situation.

Qualified Charitable Distributions (QCDs)
Those readers who are 70 ½ or older and have retirement accounts are probably aware that the IRS requires you to take distributions from those accounts each year. These are Required Minimum Distributions (RMDs). For several years, the IRS has allowed IRA account holders (Traditional IRAs, Inherited IRAs, and inactive SEP or SIMPLE IRAs) who are 70 ½ or older at the time of distribution, to direct an amount up to $100,000 directly to one or any number of 501(c)3 charitable organizations. This can satisfy part or all of an RMD in an amount up to $100,000. If you are fortunate enough that your RMD is over $100,000 then you would still need to take the remaining amount.

In the past when there were more itemizers, a QCD might not have been as valuable because many taxpayers could simply claim a charitable deduction. While not an optimal approach, the donor still reaped the vast majority of the tax benefit. Now with many more taxpayers taking the standard deduction, a QCD is suddenly a much more important charitable planning strategy.

Here’s why: donating all or part of your RMD is a direct distribution and not a deduction, you do not take possession of the funds. As a distribution it does not get reported as income, so it does not matter whether one itemizes or takes the standard deduction. This means those pushed to take a standard deduction can be charitable and still reap a tax benefit.

There are also several ancillary benefits of doing this that existed in the past, but bear repeating today. First, since a QCD is not reported as income it doesn’t factor into your Adjusted Gross Income (AGI). That may be important because of several AGI-based figures, and keeping that number as low as possible has several potentially positive knock-on effects. The first is that it may reduce taxability of Social Security payments. The second is that it may reduce Medicare premiums. The third, and potentially most valuable for seniors, is that it produces a lower threshold for deductibility of health care expenses.

Doing a QCD comes with some rules, so consult with an advisor. Some big ones are that you have to be over 70 ½ to start doing them, the funds need to be paid directly from an IRA to a 501(c)3 charity, and RMDs are the first dollars out of an IRA in a tax year, so plan your distributions around your giving.

Donor-Advised Funds (DAFs)
One way to recoup a charitable deduction is to concentrate giving in certain tax years so that the size of the deduction allows the donor to itemize and claim a tax benefit. A common concern we hear from charitably inclined clients is that such a strategy may put undue financial strain on the charities they are supporting, as those organizations may plan on getting those funds annually and spend it too fast.

Parishioners with those concerns and the means to plan their giving over several years may want to consider a Donor-Advised Fund. A DAF is like your own small-foundation where charitable contributions go in, a deduction gets taken up front, and funds can be disbursed over several years. This has the effect of bunching charitable deductions in certain years for tax purposes while controlling the pace of the actual disbursements. It should be noted that you cannot direct a QCD to a DAF.

Donating Appreciated Assets
One of the best ways to optimize giving and potentially have more to give is to donate an appreciated asset held in a taxable account. Examples of appreciated assets are typically shares of stock, exchange traded funds, or mutual funds. While this makes a lot of sense, in practice we see few people coming to us looking to donate something other than cash.

As an example, let’s say you wanted to donate $50,000 to Hillcrest Academy’s Capital Account and you have the choice between donating $50,000 from a checking account or $50,000 of a company’s stock, of which $10,000 is the original cost of your investment. You could simply write a check for $50,000. But if you gift the stock, Hillcrest could then sell it without a tax consequence, and you would avoid capital gains taxes on the $40,000 gain. Looking at this another way, if you were looking at a multi-year charitable plan and doing a Donor-Advised Fund, you could gift the stock to the DAF and then it could be sold without incurring a capital gain. The funds could then be disbursed according to your plan. Note that to get a deduction for the fair market value of the security, it must qualify for long term capital gain treatment (be held longer than one year).

Conclusion
Many US taxpayers filed their returns in April only to find that the TCJA took their charitable deductions away. That doesn’t necessarily need to be the case. Careful planning and thoughtful stewardship can create measurable value and redistribute funds away from Uncle Sam to other, potentially more worthy beneficiaries.

Gary Ribe is a managing partner of Accretive Wealth Partners in Red Bank, New Jersey. He serves as the firm’s Chief Investment Officer. Gary is a CFA Charterholder, a CFP® Professional, and has an MBA with Asset Management Concentration from the Darden School of Business at the University of Virginia. He is a member of Hillside Church in Succasunna, New Jersey.

Stephen Esposito, CFP® and Eric Furey CFA, CFP® both made substantial contributions to this article.

Sources:
www.taxpolicycenter.org/briefing-book/what-standard-deduction

Disclosures:
Accretive Wealth Partners, LLC (“Accretive Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Accretive Wealth and its representatives are properly licensed or exempt from licensure.
www.accretivewealthpartners.com

Any information provided herein is for educational and informational purposes only and is not intended to constitute tax or legal advice. Neither Accretive Wealth Partners, LLC nor any of its representatives provide legal or tax advice. The information provided herein cannot be used to avoid tax penalties and is not intended to recommend any particular tax plan or arrangement.

Please consult a tax advisor before making any decisions based on the information provided herein.