As you settle into the pews for Sunday service, the pastor mentions to the congregation that it’s ‘Giving Sunday’ – the annual ritual of giving parishioners the opportunity to give, the responsibility to share, the joy of tithing. Imagine the pastor beginning the homily with a parable about the time the sinner met with the Financial Planner… OK, that’s a stretch, but let’s take a look at different ways you can give to your Church or favorite charity. The traditional method historically involved writing out a check each week, placing it neatly in the Church envelope, and proudly depositing it in the basket as it was passed around during the offering. After visiting with your local financial planner, people learned there was a better way to give.
Giving appreciated investments held outside of retirement accounts to the Church or charity is a more tax efficient method. Note: “Appreciated investments” are securities that have increased in value since purchase. If you were to sell these assets, you’d pay taxes on the growth in the year of the sale. By gifting these securities to the charity, you avoid paying capital gains tax on the growth in the investment and the charity avoids this gain because non-profit entities do not pay taxes.
Historically, a gift like this would be tax deductible, but the Tax Cuts and Jobs Act of 2017 will change charitable giving moving forward. Here is the background: Based on the increase in the Standard Deduction, approximately 90% of all tax filers will not itemize their taxes. This means that although charitable giving remains an important goal for many families, those gifts will no longer produce a tax deduction. One solution is to lump several years of charitable contributions into one year, with the objective of pushing your itemized deductions over the standard deductions. This strategy can be facilitated with a Donor Advised Fund (DAF), which is a charitable account that can be established to receive your charitable contributions. With a DAF, you could receive a deduction in the year of the gift (assuming you are over the standard deduction), but you can disperse funds to charities in future years at your discretion. Funding the DAF is most beneficial if you do it with appreciated securities, as described above.
The two methods above dealt with giving from non-retirement accounts. Next, we’ll look at how to give from your IRA (if you are old enough). The new frontier of charitable giving will be done via Qualified Charitable Deductions, or QCDs. First and foremost, you need to be over age 70 ½ to take advantage of this strategy so it’s not available for those younger pew sitters. A QCD is a gift from your IRA directly to a charity of your choice. The amount of your gift counts towards your Required Minimum Distribution (RMD) and it is NOT taxable. The maximum amount of a QCD in any given year is $100,000. So the charity receives a gift, you satisfy some or all of your RMD with the gift, and the gift is non-taxable. Because most people will use the Standard Deduction, giving from the IRA provides a quasi tax deduction because the IRS allows these withdrawals from your IRAs to happen tax-free. In summary, if you’re over 70 ½ virtually everyone making charitable gifts should be making gifts from their IRA.
So when the pastor refers you to your favorite financial planner, give Shakespeare a call and we’ll help you figure out the best way to give to charity.