Banking & Finance, Government, and Nonprofits

New tax law changes charitable giving strategies

Financial advisers and nonprofit fundraisers share approach to tax-efficient donation.

October 19, 2018
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Since last year’s tax law changes, financial advisers and nonprofits have been working to educate donors on the most efficient ways to give.

The federal tax overhaul, enacted in December 2017, nearly doubled the standard deduction amounts from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples filing jointly.

When filing taxes in general, people can claim either the standard deduction or they can claim an itemized deduction that includes donations and other deductible expenses. This means writing off donations and other expenses only is beneficial when that total exceeds the standard deduction.

So, those who typically donated more than the standard deduction before 2018 were affected when the recent law passed.

Shaun Shira, major and planned gifts director for the Grand Rapids Community Foundation, said he has suggested donors consult their financial advisers, but the foundation also has been sharing information about several strategies to donate efficiently.

“It is our belief that donors give because they believe in the mission of the organization, not necessarily for the tax benefits,” Shira said. “Those who have enjoyed those benefits in the past may want to look into a couple of strategies so they can get the largest impact.”

Shira said the GRCF has seen an increase in donor-advised funds, accounts donors can create through a nonprofit sponsor organization — such as the GRCF — that act as an irrevocable “charitable bank,” according to Ellen Winter of Grand Rapids-based Grand Wealth Management. Then, donors can advise the sponsor organizations on how much to grant and which nonprofits should receive the grants.

Someone who donates $2,500 annually, for example, could create a DAF fund worth $25,000 once each decade, Winter said. Combined with other deductibles, that person may be able to take a nice write-off that year, she said.

This strategy of bundling deductible expenses is something Winter and her colleagues have been sharing with clients.

Winter said the sponsor organization typically invests the assets, and any returns they earn are tax-free.

Shira said the GRCF also shares information about gifting highly appreciated assets, such as stocks, mutual funds and real estate, directly to nonprofits.

He said some donors have used those highly appreciated assets to create DAFs, avoiding the taxed capital gains.

Shira said the GRCF also is sharing information about IRA Charitable Rollover, or qualified charitable distribution, which allows donors over age 70½ to transfer funds directly from their individual retirement account to a nonprofit, up to $100,000 for individuals and up to $200,000 for married couples.

This allows these donors to avoid income tax on the funds transferred and to donate more than if they had first transferred the money to their personal bank accounts, according to Phil Mitchell, principal of Grand Rapids-based tax and investment strategy firm Kroon & Mitchell.

“In a sense, you just saved the tax you would have paid to give the donation,” he said.

Since people are required to withdraw a minimum amount from the IRA annually, transferring some directly to a nonprofit would essentially lower their income, therefore lowing taxes, Mitchell said.

Mitchell said these tax changes, which he called the biggest in 30 years, are important for donors and nonprofits to understand because when people believe writing off deductibles is more difficult, that may cause a downtick in contributions, even if they didn’t realize how small or big the benefit was.

“Once that perception becomes reality, you want to nip that in the bud as early as you can,” Mitchell said. “This may actually end up being a better route than what some people were doing before, anyway.”

He said the information might be more difficult for smaller nonprofits to communicate because of their limited resources, so he would encourage them to utilize information made available by financial advisers or larger nonprofits.

The GRCF is one organization he noted as doing very well in making donors aware of options.

Mitchell likes to ensure clients understand the changes only affect those who were giving more than the previous deduction amounts. Those that typically have a few hundred dollars per year in deductions, for example, really aren’t affected by the changes.

And, he clarified writing something off means decreasing taxable income by that amount, not increasing a tax refund by that amount. For a small write-off, that could mean a difference of a few cents paid in taxes.

“Some people, even when they donated in the past, they probably didn’t even realize they weren’t getting much of a benefit,” he said. “They may be indifferent to that because they’re supporting the cause.”

With the year’s end approaching — the first busy donation season since the new tax laws went into effect — Shira said it is too soon to know exactly how nonprofits will be affected, especially those that rely on many lower-level donations.

Shira predicts most of the people who make those contributions will continue to do so, however.

“Many of those individuals, I feel, are giving to those charities because they are so drawn to the mission,” he said. “I would imagine they will continue to give to those charitable organizations because they care about the work they do.”

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