Chunky Giving: The Best Reason to Start a Donor Advised Fund
Here’s the story.
The 2017 tax bill made a number of changes that impact charitable deductions, especially for middle-class taxpayers. If you typically itemize deductions and regularly give to your church or to other charities, then some of the tax law changes might actually cost you money. This is especially true for taxpayers who live in California, New York, or other high income and property tax states.
Fortunately, if you fit that profile – a Californian who normally itemizes and regularly gives to charity – you can become a Chunky Giver(!) and in all likelihood preserve, or even increase, the tax deductions you are used to receiving. What follows is a brief explanation of the problem and an easy guide to how you can solve it.
Lost Itemized Deductions
The Tax Cuts and Jobs Act of 2017 reduced most personal income tax rates but also made the following changes:
The Standard Deduction was doubled from just over $6,000 to $12,000 per person or $24,000 per couple filing jointly; and,
The deduction for state and local property taxes was limited to $10,000 per person AND to $10,000 per married couple filing jointly.
The increase in the Standard Deduction means there is no tax benefit from any potential deduction unless all of your deductions exceed $24,000 for a couple, which this article illustrates, or $12,000 for a taxpayer filing singly. If, for example you and your spouse give your church $1,000 a month ($12,000 for the year) and the sum of all of your other permitted itemized deductions is $10,000, then that total is only $22,000. In that case, you are not going to itemize your deductions but will instead claim the standard $24,000 deduction. Net, on those numbers, there is no tax benefit to your charitable giving.
The limitation on deducting state and local taxes makes the situation worse. Last year, for example, my wife and I paid $17,000 in California income and property taxes, all of which was deductible on our federal income tax return. But our 2018 deduction will be limited to $10,000, even if we pay the same amount or more in state and local taxes. What that means, in turn, is that unless our charitable giving exceeds $14,000, we will not be able to itemize deductions as the standard deduction will be higher. Even if we give more than that, our tax benefit will not be the full charitable amount but only the amount by which our itemized deductions exceed $24,000.
Even if we give more than that, our tax benefit will not be the full charitable amount but only the amount by which our itemized deductions exceed $24,000.
The Solution: Chunky Giving
The answer is to do your charitable giving in “chunks,” by which I mean as much as you can in some years and little or none in other years. This very simple technique will allow many donors to create income tax charitable deductions in excess of the standard deduction and therefore get a true income tax benefit from their giving. In some cases, the existence of the increased standard deduction will actually result in greater savings than under the old law. Let’s look at an example with the same annual charitable giving of $12,000 I used above.
In some cases, the existence of the increased standard deduction will actually result in greater savings than under the old law.
For both the Regular Giving and Chunky Giving shown in the table, the total gifted to charity over five years is $60,000. The only difference is that the Chunky Givers (you see it is a compliment!) are giving the entire $60,000 in the first year. That allows those givers’ itemized deductions to exceed the standard deduction and effectively makes the most of their charitable giving deductible. As a result, even though the total giving to charity is identical, the givers’ tax deduction increases substantially, in this case by $46,000 over five years.
As a result, even though the total giving to charity is identical, the givers’ tax deduction increases substantially, in this case by $46,000 over five years.
The only requirements to pull this off are for the givers to have enough cash or assets to make the Chunky Gift and enough Adjusted Gross Income (AGI) to take the larger deduction in one year. AGI is essentially your taxable income from all sources. That might not be as difficult as it sounds. Gifts of cash are now deductible up to 60% of AGI so if the $60,000 charitable donation in my example was made entirely with cash, the giver would need a little less than $120,000 of AGI to take the full deduction. Combinations of appreciated property and cash can be deductible up to 50% of AGI in which case the givers in my example would need $140,000 of AGI.
In most situations, the AGI limitations will not be a problem and in all situations the AGI limitations are manageable. The givers can calculate their maximum charitable deduction based on their AGI and the type of asset being given and can then only “Chunk Up” to that amount. In addition, excess deductions can be carried forward for up to five years, which, for very large one-time gifts might be a helpful technique as well.
This, in our highly biased opinion, is a great use of an NCF Giving Fund!
This, in our highly biased opinion, is a great use of an NCF Giving Fund! The givers in my example can contribute $60,000 this year to their personal Giving Fund for which they will receive an income tax charitable deduction, this year, of $60,000. Then in about 10 minutes of online instructions, the givers can make a one-time gift of $12,000 to their church for this year and also set up an automated $1,000 per month donation to their church for the next four years. The church (or other ministry) will receive exactly the same amount that they otherwise would, the givers will contribute exactly the same amount that they otherwise would, but the givers’ income tax deductions will be $46,000 higher. The only cost is in controlling the timing by donating the funds all at one time.
To set up an NCF Giving Fund, follow this link and fill out the online form. We will have your fund open in a day. You can then make tax-deductible donations to your fund by check, wire transfer, or gifts of securities. Keep in mind that 2018 donations need to be completed by year-end. For checks, you should use the US Mail, as a postmark on or before December 31 satisfies the requirements. For all other gifts, and for any questions, give us a call at 949.263.0820 and ask for Dawniel, Angie, or Bryan. Don’t ask for me, Bob Fry, because I’ll just have to call Dawniel, Angie, or Bryan to get you the answers!
© Robert P. Fry, Jr. 2018