The passage of the 2017 Tax Cuts and Jobs Act (TCJA) impacts people making charitable contributions to receive a tax benefit.
Here are 14 things taxpayers should know about making end-of-year donations.
End-of-Year Donations: What To Know
1. Donate Early
The deadline for donations is Dec. 31. Make sure your donation arrives on time, especially if you are mailing a check or making a wire transfer.
“It’s best not to wait until the last minute since tax law requires that the charity have ownership of whatever assets are being contributed by close-of-business on December 31,” said Tony Oommen, charitable planning consultant for Raleigh, North Carolina-based Fidelity Charitable.
“While checks just have to be postmarked by December 31, cash is an inefficient asset to donate, so ideally donors are contributing appreciated assets which can take time to process.”
Do not assume the charity you want to support even has a brokerage account and do not assume that stock donations can be done quickly, said Lawson Bader, CEO of DonorsTrust, an Alexandria, Virginia-based donor-advised fund.
2. Discuss Your Strategies With a Professional
Speak with your accountant or financial adviser if you have questions about how the new law will impact your tax contribution.
Discuss your options with an expert to ensure your choice is the most strategic and efficient charitable decision, he said.
“Proactive planning is required to evaluate how to maximize dollars available for giving and minimize income taxes,” Oommen said. “In consultation with a financial advisor or accountant prior to the end of the tax year on December 31, people can consider the timing of giving, selection of the assets to give and the right vehicle for giving.”
3. Use Your Company's Matching Program
Many companies will match your donation to a non-profit organization, which helps these groups serve their communities even further by receiving double the amount.
“Employees should contact their HR department to find out whether their company has such a match and what the parameters are,” Oommen said. “If the employee gives through a donor-advised fund account, it is important to ask if the company will match gifts to the donor-advised fund account or if they will match grants coming out of the donor-advised fund account.”
4. Donate Credit Card Rewards
Donate your extra credit card rewards to a non-profit. Donating your rewards such as airline miles or hotel points can be a great way to “do something good without reaching deeper into your wallet,” said Ted Rossman, an analyst for CreditCards.com, an Austin-based company. “These points and miles have real value and many card issuers, airlines and hotel chains make it easy to give them to worthy causes.”
This can help consumers because donating points or miles typically resets the expiration clock on your remaining rewards, Rossman said.
If you have some American Airlines (AAL) - Get American Airlines Group, Inc. Report miles that will expire soon (this happens after 18 months of inactivity), you can donate some of the miles and help a great organization (American partners with the Gary Sinise Foundation on the Snowball Express, which brings families of fallen soldiers to Disney World (DIS) - Get Walt Disney Company Report), and you can keep your remaining miles active for another 18 months, Rossman said.
With other issuers, it’s an extra step, but you could redeem for cash back and then donate it to a charity.
Most airlines and hotel chains make it easy to give miles/points directly to charities.
It’s also possible to do this on the charity’s side, such as Make-a-Wish.
5. Standard Deductions Increased
Some donors will not benefit as much from their charitable income tax deduction after the tax law changes. The TCJA increased the standard income-tax deduction, eliminated certain itemized deductions and decreased income-tax rates, said Stephanie Casteel, a partner at Snell & Wilmer, a law firm in Reno, Nevada.
For 2019, the TCJA increased the standard deduction to $12,200 for single filers, $24,400 for people who are married and filing jointly and $18,350 for one filing as head of household. The law imposed a $10,000 cap on the deduction for state and local income taxes (SALT) for single, head of household and married filing jointly filers and $5,000 for married-filing-single filers.
“With the lower income-tax rates, the value of all deductions decrease,” she said. “With the standard deductions higher and fewer itemizations, more taxpayers will use the standard deduction and not itemize. Many individuals make charitable gifts for non-tax reasons.”
6. Adjusted Gross Income Increased
The TCJA also changed the adjusted gross income (AGI) limitation for cash gifts to public charities was increased from 50% to 60%.
People can receive an even larger charitable deduction if they give higher amounts. This can be a savvy move for the years when your income rises because of a new job, larger bonus or sale of an asset.
7. Donate Assets From Your Brokerage Account
Taxpayers can lower their capital gains tax by donating assets from a brokerage account. Complex assets could take more time to process, so it’s a good idea to start the process early.
One of the most tax advantageous ways to donate year-end is gifting a highly appreciated security, said Chris Osmond, chief investment officer at Prime Capital Investment Advisors in Overland Park, Kansas. If you bought Apple (AAPL) - Get Apple Inc. Report when Apple traded at $50 and it now trades at $280, rather than paying capital gains, an investor can gift shares directly to their charity of choice.
“Gifting a highly appreciated security enables the donor to potentially claim the deduction on their tax return and eliminate capital gains tax exposure while also taking a charitable deduction of the fair market value of shares,” Osmond said. “When considering this option, please keep in mind that the security must have been held at least one year and a stock certificate form completed and postmarked by December 31.”
Given the run-up in the market over the last decade, it is hard to find losses to offset gains elsewhere in your portfolio. Therefore, instead of selling over-allocated positions, why not give them to a charity of your choice?
Instead of selling over-allocated positions, consider giving them to a non-profit group, said Sam Brownell, managing director of Stratus Wealth Advisors in Kensington, Maryland.
“Given the run-up in the market over the last decade, it is hard to find losses to offset gains elsewhere in your portfolio,” Brownell said. “This reduces the allocation to a security that has outperformed while also providing a potential tax break. Contributing securities that have performed well and/or have low cost basis can help your rebalance decisions in the future by reducing position with large unrealized gains.”
8. Donate Shares From Your IRA
Investors making charitable contributions may want to consider donating shares from their brokerage or retirement account to give money to the causes that are important to them while also lowering their tax bill, said Rick Swope, vice president of investor education at E-Trade Financial, a New York-based brokerage company.
“Investors don’t have to pay capital gains on their gifted shares,” he said. “The amount of money you get back from your donation depends on your income tax rate. Bottom line: Giving back to the charity of your choice can be done seamlessly through donating shares and will benefit not only the recipients but also help alleviate some year-end tax obligations,” Swope said.
9. Make a Donation for the Next 2 Years
Taxpayers can opt to bunch two or more years of planned charitable giving into a single year by using a donor-advised fund account. This allows the donor to claim a higher deduction for that tax year to exceed the standard deduction, allowing the donor to itemize deductions, Oommen said.
In the “off years” between bunched contributions, the donor could simply claim the standard deduction while continuing to support their favorite charities at “their usual cadence through grant recommendations from their donor-advised fund account,” he said.
10. Use Donor Advised Funds
Donor Advised Funds (DAFs) are growing in popularity and one way to contribute to a non-profit organization in a tax-efficient manner, allowing an investor without immense wealth to help others and still enjoy tax advantages unavailable to people who donate after paying taxes on investments, Osmond said.
These funds allow donors to establish and fund an account by making irrevocable, tax-deductible contributions to 501c (3) organization.
Donors can direct the funds nearly anyway they see fit, he said. People can also take an immediate tax deduction as the funds are invested for tax-free growth. While a number of securities can be donated to a DAF, cash or low-basis highly appreciated assets are most common.
“Offering flexibility to donors, with no annual funding requirement or disbursement requirements in a DAF, these charitable vehicles may be funded with a one-time investment or whichever frequency a donor prefers, benefiting numerous charities for years to come,” Osmond said.
11. Donate Your RMD
Taxpayers that have reached 70½ years old are mandated to take required minimum distributions from their retirement accounts. If the taxpayers do not need the cash, they can donate the required minimum distribution (RMD) to a charity and not have to recognize the income, said John Blake, a partner with Klatzkin, a Hamilton, New Jersey-based accounting and advisory firm. The maximum amount is $100,000 annually.
This is called a Qualified Charitable Rollover and while there is not a charitable deduction, the donor’s adjusted gross income is lowered.
“This is better than the donor taking the IRA distribution, recognizing the distribution in income and then taking a deduction for a charitable gift because the income recognized is not offset dollar for dollar by the charitable deduction,” Casteel said.
12. Donate Real Estate That Rose in Value
Taxpayers can also choose to donate appreciated assets like real estate to a non-profit organization, said Chris Wentzien, a financial adviser and CPA based in Santa Cruz, California.
“You don’t pay capital gains taxes and can take an income tax deduction for the full market value,” he said. “This is generally a better way to go than donating cash due to the tax savings and cash flow savings.”
People can generally deduct the fair market value of the appreciated property while avoiding tax on the gain, said Nathan Rigney, lead tax research analyst at The Tax Institute at H&R Block in Kansas City, Missouri.
13. Harvest Losses
Don’t donate a stock with an unrealized loss, said Jeffrey Craig, senior wealth adviser at Boston-based The Colony Group.
“You can benefit more by selling it and donating the cash,” he said. “You can use the loss against capital gains or up to $3,000 of ordinary income.”
When you lose money on your stock portfolio, you can still generate a gain. An investment strategy that has lost money can become a tax winner via tax-loss harvesting, a strategy that can be used to increase overall returns, Osmond said.
Using unrealized losses throughout the year, can potentially offset realized gains or income when harvesting them on realized losses. Even if you may not have any current gain, there are benefits to harvesting losses now for future use in offsetting income or future gains.
14. Set Up a Recurring Contribution
You can get a headstart by creating a recurring contribution now for 2020 so your charitable giving plans are established ahead of time. Many organizations allow you to donate monthly through PayPal (PYPL) - Get PayPal Holdings, Inc. Report or credit cards via their websites, giving you an opportunity to earn points or airline miles.