Passed in 2017, the Tax Cuts and Jobs Act ushered in many changes, including an increase in the standard deduction. The deduction for single filers is now $12,200 and $24,400 if you are a married joint-filer. In reality, this means that the number of households claiming the itemized deduction (including their exempt charitable donations) is much less compared with previous tax schemes. But, fear not. There are strategies to clear the initial standard deduction threshold.
What the Heck is Bunching?
One of the major options available to charitable donors is to “bunch” donations. To bunch donations you make larger charitable donations this year in a way that exceeds the standard deduction and then smaller ones next year to compensate. Depending on your charitable giving capacity and goals, this means you could alternate every other year or every few years.
Reminder, substantiated donations to a qualified nonprofit can be combined with mortgage interest and state/property taxes when calculating excess above the standard deduction limit. (The Greater Kansas City Community Foundation created a useful illustrated chart of this concept.
Bunching in Practice
By way of example, instead of giving you “normal” $5,000 to charity annually, consider accelerating your gift two years worth of donations in 1 year. So you would end up giving $10,000 every two years. The $10,000 is the same amount you planned to give over the two years but strategically donated in a way that maximizes itemized tax benefits. With this option, you may claim your itemized deductions over the limit one year and then take the standard deduction the next.
If you’re considering bunching donations, you may want to do so through a donor-advised fund (or DAF), which offers a unique level of donative flexibility. The DAF allows you to make charitable contributions and receive an immediate tax break for the full donation, even though you can choose to recommend grants to your fave nonprofits from the fund at a later date and over time.
Thanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.
Tangible personal property is a fancy way of saying “stuff,” such as a painting, computer, furniture, and collectibles (excluding securities, cash, and real estate). So, if you want to donate your stuff to your favorite charity, what are the tax consequences?
The amount of your federal income tax charitable deduction depends on the concept of “related use.” If appreciated tangible personal property is considered related to the charity’s exempt purpose, the deduction is based on fair market value (FMV) and available to the extent of 30% of your adjusted gross income (AGI).
If property is considered unrelated to the public charity’s exempt purpose, you must reduce the FMV by any amount that would have been long-term capital gain had you sold the property for its fair market value. (In short, if the FMV was greater than the basis in the property, your deduction is limited to your basis.)
To sum it up: in order for a donor of tangible personal property to be able to deduct its full FMV, the charity must use the object in a manner that is related to its (the charity’s) exempt purpose. A classic example is the gift of a piece of art, like a sculpture or painting, to an art museum.
This concept of “related use” can have very profound tax consequences. For instance, assume Jill Donor owns a painting which is now worth $100,000, but Donor purchased it for only $20,000.
If Donor gives this painting to an art museum that keeps and displays the painting, Donor can deduct the painting’s full $100,000 FMV. If Donor gives the same painting to, say, a nature conservancy, which will sell the painting and use the proceeds, Donor can deduct only her $20,000 cost.
Note, that even if the object is potentially related to the charity’s mission–such as a painting given to an art museum–if the charity’s intention is to sell it upon receipt, then the gift is not for a related use and the donor’s deduction will be limited accordingly.
From our hypothetical, it doesn’t necessarily have to be gifted to a museum to be considered for a related use. In Private Letter Ruling 9833011, the IRS ruled that a gift of art to a Jewish community center would be for a related use, as the artwork had both religious and cultural significance. Also, a painting gifted to, say, a hospital may be for a related use if the hospital will display it in a common area so that it helps foster a healing environment for patients.
The big takeaway for donors? Donors should obtain in writing the charity’s intent to use the property for a purpose related to its mission.
I want to help you, whether you’re a nonprofit organization or donor, wisely maximize your charitable giving. Don’t hesitate to reach out by phone (515-371-6077) or email (email@example.com).
Thanks for reading the 25 Days of Giving series. I’m “unwrapping” posts on various aspects of charitable giving each day through Christmas.
A less-than-obvious, but an ideal asset for charitable donations is appreciated long-term, publicly-traded stock. Before we list the benefits, let’s break down the terms.
Appreciated simply means increased in value.
Long-term means stock held for more than one year; stock held for 366 days. A long-term capital asset is generally taxed at a lower rate.
Publicly traded stock just means a publicly held company whose ownership is dispersed among the general public in many shares of stock which are freely traded on a stock exchange or in over the counter markets.
The benefits of charitable gifts of appreciated, long-term, publicly-traded stock are numerous.
Under federal tax law, charitable gifts of appreciated, long-term stock have a double benefit: (1) the long-term capital gain is excluded from taxable income, and (2) the charitable contribution deduction is the fair market value of the stock.
Iowa law also provides a third benefit for making a charitable gift of stock; donors can receive a state tax credit of 25% of the gift under the Endow Iowa Tax Credit Program.
As if that wasn’t enough to convince you there’s yet another benefit. The substantiation rules for gifts of donated securities are more relaxed than for gifts of other types of donated property. Gifts of publicly traded securities do not require an appraisal to document value. This is important, as non-cash gifts of more than $5,000 generally require a qualified appraisal by a qualified appraiser. (In case you were wondering, the value of gifts of publicly traded securities are based on a simple calculation: the arithmetic mean of the highest and lowest selling prices on the date of the gift.)
If you’re interested in gifting stock to a qualified charity as a part of your end of year giving, make sure you’re doing so in a way that maximizes all of your financial benefits. Or, if you’re a nonprofit leader wanting to accept gifts of stocks, don’t hesitate to reach out via email or phone (515-371-6077) if you would like to discuss further.