When Donating, Please Don't Use Cash
With the passage of the Tax Cuts and Jobs Act of 2017, a sea change of tax changes of all taxpayers in aggregate came to the fore. Amongst the myriad of changes were modifications to Itemized Deductions. The net of the Itemized Deduction changes resulted in a significant number of taxpayers switching from Itemizing to using only the Standard Deduction. With this change came significant impacts to Charitable giving.
In 2018, Americans donated about 1.7% less to charity than in 2017 (Source). While there is unlikely to be only one Causal Factor for this drop-off, the Tax Cuts and Job Act of 2017 likely played at least some part. Specifically, with the doubling of the Standard Deduction from previous levels, many previous donors withheld their contributions since there was no Income Tax benefit to giving.
Under the new tax code, the percentage of those with Adjusted Gross Incomes (AGIs) of $200,000 or less have a 78% of using the Standard Deduction instead of itemizing (Source). This is a far greater number than under the previous tax codes. Even among the higher earners - those with AGIs exceeding $200,000 - roughly half will use the Standard Deduction (Source). As a consequence of this new reality, many charitable donations will no longer provide ANY income tax benefit as they did previously. To the 100% altruistic, this is a minor detail. For others, this may be an issue. Despite the changes in the tax code, there is still hope for those looking to garner an income tax benefit from their Charitable Giving.
Why Not Cash?
When giving, one of the more convenient ways - undoubtedly - is to simply give straight cash. To be sure, this is still a viable way to give. However, some of the drawbacks for the following:
- No record of your giving...some verification is required for larger donations for tax deduction purposes
- Practical limits - if you want to give a substantial sum, gathering enough cold, hard cash can present some issues
- Impracticality to the receiving organization...while charitable organizations will accept many forms of money, cash is problematic as tracking it is difficult
In short, give cash if you must, though please consider other options.
Why Not a Check?
The best way to answer this question is to - like Jacobi - invert and look at better alternatives. Here are a few:
1) Appreciated Stock
By donating appreciated stock, you avoid the Capital Gains Tax on the security. At present rates, this could be a 23.8% savings via Capital Gains Tax avoidance. Moreover, if you are able to itemize, you get a further benefit by being able to add this donation to your Itemized Deductions. And even better, you can also re-establish your position in the security you recently exited with a new share purchase, which will, of course, step-up your basis to the current price. Here is an example for you to consider:
To reiterate, you may or may not be able to itemize deductions with this method. In either case, you will garner some Income Tax benefit when using this method, and the charity will still receive the same net proceeds. For those looking to exit a concentrated stock position, this can be a particularly useful technique.
2) Qualified Charitable Distribution
Let's say you are over 70 Years old and have frequently donated to a certain charity over the years. In this case, the Income Tax Code is your friend. Rather than taking a Required Minimum Distribution from your Retirement Account, which is compulsory at age 70 1/2 for Traditional IRAs, you can instead make donations to charity. This mechanism is called the Qualified Charitable Distribution (QCD). When you donate in this manner, your RMD requirement is satisfied AND the income does not show up on your Income Tax Return.
At Age 70, keeping income off of your Tax Return is vital. The primary reason is keeping your Social Security benefits from being taxable. Examples are a bit beyond the scope of this paper. However, suffice it to say, for Income Tax purposes, lower income generally mean lower taxes. For the 70 and over crowd, this is especially true.
There is required documentation for QCDs, so please make sure to cover all your bases with your Tax Advisor when implementing this strategy. It is not hard, so please don't let this requirement dissuade you.
3) Donor Advised Fund
For those looking to donate considerable sums to Charity, a Donor Advised Fund (DAF) can be a very useful tool. I have written extensively about these in the past, so please read this for more information.
These three strategies trump writing a check, so please consider them when you are formulating your giving strategies.
A Practical Example
It is not uncommon for people to donate to a charity on a monthly basis. One example would be donations to a religious organization such as a church. Frequently, church members will tithe. One method is to simply arrange for an automatic deduction from one's checking account as you would do for any other monthly expense. This is akin to writing a check as described above. An alternate, and slightly more tax efficient, method is to utilize some of the techniques described above. Here is an example:
Obviously, the stock market is not going to increase in value every year. However, historically, it has increased in more years than not. In those years when there is a decrease, you can simply sell the stock at the end of the year, book the capital loss, and then make a smaller than anticipated donation. In the long-term, you stand a good chance of giving more than you otherwise would have.
Donating to charity is clearly a worthwhile endeavor. While giving need not ALWAYS have a benefit to the Donor, it is a good idea to incentivize the Citizenry to donate to worthy causes. In today's tax environment, the Donor must be ever more vigilant in utilizing the available strategies to maximize the Income Tax benefits available. Hopefully some can utilize a few of the techniques described here.
Comments, criticism, and suggestions are always welcome. If you would like to provide any, please contact me here.