2018 Tax Law and charitable giving strategies
Sullivan Bruyette Speros & Blayney (SBSB), the firm that manages Arlington Free Clinic’s investment portfolio, recently shared documents that they created for their individual financial planning clients, illustrating the implications of the 2018 income tax law. Listed below with brief descriptions are several options for charitable giving, including factors that may make one choice preferable to another depending on individual circumstances.
SBSB also welcomed AFC to share two resources (Is it Smart? Charitable Gifting of Cash vs. Highly Appreciate Securities and 2018 Tax Reform Presentation) that they developed, should they be of interest to our supporters. Please consult your own financial advisor to develop the strategy that is most appropriate for you!
Qualified Charitable Distributions: Appropriate for donors who are 70-1/2 or older in the current year who do not itemize their deductions. The benefit of this strategy to this demographic is that they are able to reduce their taxable income up to $100K as an “above-the-line” deduction; i.e., above the Adjusted Gross Income (AGI) line item on their tax return. Effectively, they are getting a full above-the-line “deduction” whereas they would not receive a tax deduction at all or only partially, due to not exceeding the standard deduction amount with their non-charitable deductions (medical, taxes, mortgage interest, etc.)
Appreciated Securities: Appropriate for donors of any age who have investment securities that are highly appreciated and do itemize their deductions. The benefit of this strategy to this demographic is that they will receive the “below-the-line” deduction; i.e., below the Adjusted Gross Income (AGI) line item on their tax return. Additionally, the donor will relieve themselves of the future capital gains tax when they eventually sell the security. In some rare cases, it may also be helpful for someone who has appreciated securities with unknown cost basis which is preventing the donor from otherwise selling the stock. For those donors whose deductions do not exceed the standard deduction amount but are very close, a variation of this is to make large charitable gifts every two or three years (e.g., $30,000 in one year instead of $10,000 each year for three years) such that they exceed the standard deduction and itemize in those “charitable bunching” years, but take the standard deduction in the non-bunching years.
Donor Advised Funds: Appropriate for the same demographic as for Appreciated Securities. However, this strategy is appropriate for those donors who would like to fund future charitable giving by taking advantage of giving large amounts in years where their tax bracket will be higher than the future years. An example of this are when a donor has a single high-income year due to liquidity events such as selling a business or having large capital gains from selling large amounts of securities. Another example is funding the Donor Advised Fund in the several years while they are still working and are in a high tax bracket and distributing the donations over the rest of their life while they are retired and in a lower tax bracket.
Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT): Appropriate for the same demographic as for Appreciated Securities. However, there are two additional criteria. First, the donor would need to have large charitable intent, realistically $250,000 or more to justify the administration costs of the trust. Second, the donor is interested in receiving an annuity from a CRT trust during their lifetime or providing a non-charitable beneficiary (e.g., family member) an annuity from a CLT at their death.
Cash: Appropriate for demographics where the above strategies do not apply and/or the donor would just prefer the ease and simplicity of cash.