Tax strategies for the charitable donor
by Bruce E. Bell, CPA/Attorney
Bruce E. Bell is a CPA/Attorney practicing at the Chicago law firm of Schoenberg Finkel Beederman Bell Glazer LLC. A founding member of the firm, Bruce chairs the firm’s transactional and tax practices. He concentrates on federal tax, estate planning and general business matters. Bruce can be reached at 312-648-2300 or firstname.lastname@example.org.
The Tax Cut and Jobs Act of 2017, which raised the standard deduction and placed limitations on itemized deductions for individual taxpayers, has impacted the ability of many taxpayers to deduct charitable contributions. Married taxpayers who file joint income tax returns with their spouses in 2023 must aggregate more than $27,700 to reap the benefit of itemized deductions on their individual income tax returns. Coupled with the $10,000 cap on state and local income tax deductions and deduction limits on mortgage interest and medical deductions, taxpayers now face greater challenges in deducting contributions to charitable organizations.
Some of the strategies which charitably inclined taxpayers should consider are the following:
Bunching itemized deductions. Taxpayers should be savvy as to how and when they pay their charitable contributions. It may no longer make sense to make annual contributions to one or more favorite charities if the donations will not yield a tax benefit. A more prudent strategy may be to donate large amounts in one year and defer making charitable contributions in other years. For example, if a married taxpayer filing a joint income tax return with his or her spouse who has $17,000 of non-charitable itemized deductions normally contributes $10,000 per year to charitable organizations, the taxpayer will reap no tax benefit from the charitable contributions since only itemized deductions in excess of $27,700 are deductible. If instead, the taxpayer contributes $20,000 to charity in one year and nothing in the following year, the itemized deductions in excess of $27,700 can be claimed on the taxpayer’s tax returns in the year the $20,000 contribution is made.
Creation of private foundation. Donors who make meaningful, annual contributions to charity should consider creating their own private foundations. As a standalone charitable organization, taxpayers can deduct contributions made to the foundation and, subject to payout and other statutory requirements, the foundation can make payments to other charitable organizations at one or more times in the future. One important advantage of a private foundation is that taxpayer contributions are deductible when payments are made to the foundation, not when the foundation makes payments to other charitable organizations. This permits a charitable donor to make a large, deductible contribution to a foundation in one year while allowing the foundation to continue making contributions on an annual or more frequent basis to other charitable organizations. Foundations offer other benefits such as the right to control the organization and the opportunity for salaries to be paid to the donor and other family members as well as third parties for services rendered.
Donor advised funds. Similar results can be achieved by creating a donor advised fund (a “DAF”). A DAF is a separate fund created with a financial institution or charitable organization where contributions can be made at any time and disbursements, while subject to the institution’s or organization’s approval, are generally made at the donor’s request. Just as with the private foundation or with a donor who bunches itemized deductions, the donor can make large contributions to a DAF in one year and benefit from the tax deduction in that year. DAFs are less costly to administer than private foundations but, in some cases, do not offer the same flexibility as private foundations.
Qualified charitable distributions. Taxpayers who have attained age 70 1/2 can authorize their individual retirement accounts (IRAs) to make qualified charitable distributions (QCDs) to charitable organizations. These are direct payments by an IRA to a charity. A taxpayer who makes charitable contributions with personal funds may not be able to claim the charitable gifts as itemized deductions due to the statutory limitations on itemized deductions. Taxpayers can instead make QCDs aggregating not more than $100,000 per year. QCDs are not taxable so the result is essentially the same as if the taxpayer under prior law received an IRA distribution, paid the amount received to a charitable organization and reported the payment as an itemized deduction on his/her personal income tax return.
Contribution of appreciated securities. One mistake many taxpayers make is making large charitable contributions in cash to charities when they hold a portfolio of marketable securities which have appreciated in value. The charitably inclined taxpayer who cannot or chooses not to take advantage of any of the above opportunities would be well served by contributing appreciated securities to one or more charitable organizations. A taxpayer who holds appreciated stock and sells the stock will incur a tax on the gain from the sale. If instead, the taxpayer contributes the appreciated stock to a charitable organization, the appreciation on the contributed security will not be taxed. Moreover, the fair market value of the contributed security is eligible for an income tax deduction, subject to the limitations on claiming itemized deductions. The taxpayer who does not wish to part with an appreciated stock position should simply donate the appreciated security to charity and then use the cash that otherwise would have been used for the charitable contribution to replace the donated stock. The taxpayer will benefit as the repurchased security will have a higher tax basis.
Current legislation has no doubt created obstacles for taxpayers who wish to reap tax benefits from charitable contributions. Careful planning, however, can permit taxpayers to continue to enjoy tax benefits from charitable contributions.