The recently enacted Tax Cuts and Jobs Act brought many changes to the tax code. While the standard deduction was essentially doubled, the Act eliminated or reduced many popular itemized deductions. The deductibility of charitable donations, however, was left mostly unchanged. The increase in the standard deduction has raised questions about how best to optimize the tax benefits from charitable giving, particularly from those clients who previously itemized their deductions but may no longer see a benefit with the now high standard deduction. The change in the tax code has increased the popularity of both Donor Advised Funds (DAFs) and Qualified Charitable Distributions (QCDs).
DAFs are separate accounts that are set up to hold charitable contributions and offer significant flexibility for people with regard to philanthropic goals. Donations made to the account are immediately tax deductible (with some limitations), while grants from the DAF to charitable organizations can be made at any point in the future. Similar to Health Savings Accounts (HSAs), DAF contributions are tax deductible in the year they are made and must be used for a specific purpose (health care expenses for HSAs and charitable giving for DAFs). The funds in the account do not expire and do not have to be granted immediately but, rather, can be given at any point in the future. Additionally, contributions to DAFs can be invested and grow tax free, offering the potential of even greater amounts to be made available for charities in the future.
Individuals with traditional IRAs who are at least 701/2 years of age might also consider a QCD, which is a direct transfer of funds out of an IRA to a qualified charitable organization. While the charitable gift is not tax deductible, the withdrawal from the IRA is not included in taxable income and is applied to the account owner’s Required Minimum Distribution during the year in which the QCD is made. The gift to the charity essentially becomes a tax-free distribution from the IRA while still reducing the annual Required Minimum Distribution dollar-for-dollar (up to $100,000 per individual per year).
As we approach the end of the year and people begin to think about year-end charitable giving, we encourage you to reach out to us if you’d like to learn more about Donor Advised Funds or Qualified Charitable Distributions.