Donors want to know how the Tax Cuts and Jobs Act will impact their taxes and affect their donations to nonprofit organizations. The best way to secure your donor base is to inform them about the changes that matter most to them. Read on for key information that will promote effective charitable giving strategies and tax efficient giving.
1. Help Donors Help You
Rethink your fundraising techniques to stay current with the widespread changes caused by the Tax Cuts and Jobs Act:
- Take your fundraising strategy a step further. Guide donors to “plan their giving” with options that will benefit both them and your organization,
- Leverage charitable giving strategies that encompass traditional approaches for “planned giving” vehicles and “current giving” and
- Expand your network. Join forces with donors’ professional advisors, outside fundraising and giving consultants to help gauge what industry-best practices are adapting to the tax code changes.
2. Use New Tax Law Talking Points
Guide your donors through new tax code changes.
- Donors who qualify for the increased standard deduction (single $12,000, joint $24,000, head of household $18,000) will not see a line item on their tax return for charitable contributions.
- The new law caps tax deductions at $10,000 and eliminates miscellaneous deductions including portfolio expenses and tax preparation fees.
- The increase in the standard deduction is a simplification and, as a result, the donor’s tax return should be easier to prepare.
- Many donors may still be able to itemize, despite the increased standard deduction, and can benefit from these tax law changes.
- First, they can deduct cash contributions up to 60% of their adjusted gross income (AGI)--an increase of 10% over the old 50% AGI limitation.
- Second, the “Pease Deduction Limitation” is suspended for ten years, which means that donors will get the full benefit of charitable contributions. Prior to 2018, itemized deductions were reduced by 3% of AGI that exceeded thresholds. This is another simplification that provides a benefit.
3. Encourage Donors to Gift Appreciated Stock
Make your donor aware that gifts of appreciated stock provide a double benefit.
- Donors don’t pay any income tax on the increase in value over the purchase price or other basis when they donate appreciated stock.
- They also get a full charitable tax deduction (to the extent it exceeds the standard deduction) for the fair market value of the donated security on the date of donation.
- For donors who don’t want to make a large gift to a single charity, Donor Advised Funds (“DAFs”) can accept the appreciated stock. Accepting the appreciated stock will not change the tax advantaged savings and the donor can advise the DAF to make contributions to multiple charities over multiple years.
4. Become Familiar with Donor Advised Funds
Many advisers promote using DAFs as an economically efficient giving tool. Estimated at nearly $1 trillion, DAFs represent a tremendous wealth of support for nonprofit organizations. Based on a recent report by Giving USA, total annual dollars contributed to DAFs between 2008 and 2014 increased from approximately $10 billion to $20 billion. Not only did contributions rise annually reaching, the total number of individual donor-advised funds increased every year as well.
- Donors can take advantage of the tax deduction and the ability to postpone deciding which charitable purpose to allocate their dollars.
- The DAF is able to accept donations of appreciated assets that a local charity may not be able to accept.
- The donor avoids capital gains tax and can direct the DAF to distribute the proceeds to the local charity (net of administrative charges). However, donors need to be aware of the many restrictions on DAFs. Such as: DAFs cannot cover the non-deductible portion of tickets to charitable events and DAFs cannot satisfy donor pledges.
DAFs are a potential source of new funding and we recommend that local charities explore relationships with local community foundations. Although the local charity may not be able to influence donor directed grants, management of the local community foundation has discretionary funds that can be directed for the good of the local community with guidance from the local charitable community.
5. Consider Bunching
Due to the increased standard deduction, fewer donors will itemize and fewer itemizers means fewer donors that can use a charitable tax deduction. DAFs are a useful tool that enables donors to bunch multiple years of charitable giving into one year. This approach increases the charitable tax deduction, and potentially exceed the standard deduction.
- Consider soliciting donor restricted contributions. Donors can “bunch” multiple years of donations in one year andadvisethenonprofit that the donations cover two, three or more years. Generally accepted accounting principles (No. 2016-14 Topic 958) require nonprofits to record the full amount of the donation as current year revenue classified as donor “time” restricted.
- Nonprofits that implement this strategy will eliminate the need to use a DAF. This is beneficial as the nonprofit controls the funds at all times and doesn’t lose a percentage to the DAF for administrative handling charges.
6. Add Charitable IRA Distributions to Your Strategy Toolbox
Qualified charitable distributions (QCDs) from individual retirement accounts (“IRAs”) continue to be an efficient giving vehicle.
- Donors with IRAs who are 70 ½ years or older are subject to required minimum distributions (“RMD”). They can make a donation directly from their IRA to the publicly supported charity.
- While the donor does not get a tax deduction for the donation, the QCD, up to $100,000 annually, is excluded from income taxes and lowers the donor’s AGI, which can trigger additional tax savings.
- Similar to the DAF, the donor is prohibited from receiving any personal benefit and should not use the QCD to attend a gala or similar charity sponsored event.
- Keep in mind that DAFs and private foundations are not eligible to receive QCDs.
Bonus Strategies to Consider
The value of other planned giving vehicles, including charitable remainder trusts and charitable gift annuities, is not diminished by the tax law changes. Charitable gift annuities provide another bunching option and are easier to implement than charitable remainder trusts, a more sophisticated tool that generally requires professional advisers to implement.
We welcome the opportunity to address your questions on the impact of the Tax Cuts and Jobs Act on charitable giving strategies. Please contact your professional advisors at Friedman LLP.