Philanthropy has the unique quality of benefiting both those who give and those who receive. The United States is a generous nation. In fact, annual charitable gifting in the U.S. totaled over $427 billion in 2018, according to Giving USA 2019. Yet, from a more practical point of view, charitable giving has valuable income tax benefits that can transform even the less altruistic into full-blown philanthropists. Whatever the motivation, philanthropy has the same impact on those in need.
A tax-deductible charitable contribution is a gift of cash or property made to or for the use of a charitable organization. To qualify for an income tax deduction on a charitable contribution, a taxpayer must itemize deductions on his or her income tax return, meet substantiation requirements and donate to a qualified charitable organization. Only contributions to an IRS “qualified organization” are potentially tax deductible. These include, but are not limited to, religious organizations, nonprofit schools and hospitals. To ensure the organization is qualified, a donor should ask for the organization’s tax exemption certificate. Certain charitable organizations qualify as “50% charities” allowing the annual deduction of cash gifts to equal up to 60% of the taxpayer’s adjusted gross income (AGI).
From What Assets Should My Contribution Come?
Once you decide to make a charitable contribution, the next choice is what to use to fund that gift. Cash is generally chosen, but other assets may present better tax planning opportunities. For example, it’s particularly beneficial to make a charitable donation of highly appreciated property held for more than one year that, if sold, would qualify for long-term capital gains tax treatment (e.g., stock). If such property is contributed to charity in-kind, the appreciation is not subject to capital gains tax assuming the gift complies with all of the applicable rules.
Example: William purchased a stock for $10,000 more than one-year ago and the stock is now worth $60,000. If he sold the stock today and gave the charity the $60,000 sale proceeds, he would have to report the $50,000 capital gain and pay tax thereon. Alternatively, if William donated the $60,000 of stock directly to a public charity, he would qualify for a charitable tax deduction (subject to annual deduction limits) equal to the fair market value of the stock ($60,000) and avoid paying the capital gains tax on the $50,000 of appreciation.
The situation is very different where the stock is a loss. In that case, you are better served by selling the stock to realize the capital loss and then donate some or all the sale proceeds to charity. This way, you not only realize the benefits of the charitable deduction but also the tax savings from a capital loss.
To take an income tax deduction, all charitable contributions must be substantiated (or documented). No deduction can be taken for a monetary gift unless the donor has a bank record or acknowledgement from the charity showing its name, date and the amount of the contribution. For donations of noncash property, the donor must have a receipt from the charity and a record showing his or her name and description of the gift.
Implications from the Increased Standard Deduction
The Tax Cuts and Jobs Act of 2017 nearly doubled the standard deduction (2019 $12,200 for individuals, $24,400 for married filing jointly). Consequently, many taxpayers are no longer itemizing, as their deductions are less than their applicable standard deduction. Making a charitable gift directly from your IRA to a qualified charity may be a tax-wise solution, as a result. A qualified charitable distribution (QCD) is only available to IRA owners who are age 70½ or older and is limited to $100,000 per taxpayer per year. Thus, a married couple filing jointly both over age 70½ and each having substantial IRAs (at least $100,000) could transfer up to $200,000 this year. Donor advised funds, private foundations, certain charitable trusts or supporting organizations are not qualified to receive QCDs.
A qualified charitable distribution (QCD) may 1) satisfy all or part of your required minimum distribution (RMD) from a traditional IRA and 2) have the added bonus of being excluded from your taxable income. The amount of the QCD is not an itemized deduction. For those people over 70½ who can no longer itemize their charitable gifts and do not need their RMD for living expenses, the QCD may be a very powerful income tax and charitable planning option.
What About Donor Advised Funds (DAFs)?
For decades, many Americans have created and nurtured philanthropic values in their family through Donor Advised Funds (DAFs). A DAF is created by a sponsoring charitable organization (501(c)(3)). Contributions of personal assets (including cash, stock and real estate) may be made to the fund at any time, which qualifies for an immediate current-year charitable income tax deduction. The donor’s contributions grow tax-free in an investment account managed by the sponsoring charity. Once contributions are accepted into the account, the organization has legal control of the assets. Donors may make nonbinding recommendations to the sponsoring charity with respect to the distribution and the investment of fund assets. The donor, however, cannot order the fund to take a specific action. The DAF serves as a simple, less costly option for families to achieve a lifetime of charitable giving and income tax benefits.
Contact your Wealth advisor to learn more about BB&T resources that can help you put your plan into action.
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About the Author
John Marold, JD, CTFA
Senior Vice President, Wealth Financial Planning & Fiduciary Resource Specialist
John is responsible for the overall management, technical guidance and compliance oversight for Wealth Division’s Individual Retirement Accounts. He graduated from the University of Wisconsin, Madison and earned his law degree from the University of North Carolina School of Law at Chapel Hill. John is a regular speaker for continuing education programs for Duke University and Wake Forest medical schools, CPAs, Certified Financial Planners, Certified Trust and Fiduciary Specialists, and insurance advisors.