The U.S. government has a long history of encouraging its citizens to donate to charity. More than a century ago, the government began subsidizing charitable giving by allowing taxpayers to deduct donations they made to eligible nonprofit organizations.
But since the 2017 Tax Cuts and Jobs Act (TCJA) raised the standard deduction, far fewer individuals are getting a federal income tax benefit from their charitable giving. In 2019, the standard deduction is $12,200 for single filers and $24,400 for joint filers, nearly double the 2017 standard deduction of $6,350 for single taxpayers and $12,700 for married taxpayers. It’s easy to see why the Joint Committee on Taxation projected that elections to itemize would drop from more than $46 million in 2017 to just $18 million in 2018.
For taxpayers with itemized deductions that are approaching the annual standard deduction limit, one way to get the most bang for the charitable buck is to “cluster” donations. Bunching two or three years of donations into one tax year can bump itemized expenses above the standard deduction threshold for that year. This will ensure you get a tax benefit from your donations, and bonus: You can easily take the standard deduction in off years.
When planning charitable donations, it helps to be aware of all the benefits and caveats. We have created a handy charitable donation reference guide for different types of donations.
4 Tax-Advantaged Ways to Donate Over Time
If you have money to donate but aren’t ready to bestow it all just yet, there are four tax-advantaged options you should consider.
A private foundation is a 501(c)(3) entity that is funded purely from the donations of a single taxpayer or family. Like other nonprofit organizations, the foundation must file annual reports with the IRS, follow certain disclosure requirements, and be managed by a board of directors. These requirements make private foundations expensive to run.
Donors receive a deduction when they contribute to their foundation. Assuming they place a trusted family member or friend on the board of directors, they also have a lot of say in how the money is doled out.
Donor-advised funds are sponsored by a 501(c)(3) organization, giving taxpayers the chance to donate money over time to a specific charity. Donor-advised funds are much simpler to administer than private foundations, but taxpayers give up some control. In order to receive a deduction for their contributions, taxpayers must relinquish control of their assets to the sponsoring charity.
Charitable Remainder Trust
Charitable remainder trusts (CRTs) are irrevocable trusts that will benefit a designated charity at some point in the future. For a specified period, a CRT disburses income to the trust beneficiary. At the term’s end, it donates the remaining assets to the charity. In addition to reducing the amount of their estate, taxpayers receive a deduction for the present value of the future donation.
Most taxpayers designate themselves as the trust beneficiary. This allows them to simultaneously invest in a charity and their own financial future.
Charitable Lead Trust
A charitable lead trust (CLT) can be thought of as the inverse of a CRT: For a specified period, it disburses income to one or more charitable organizations, and at the term’s end, it sends the remaining assets to trust beneficiaries. Trust beneficiaries are typically family members of the taxpayer, so the remainder’s estimated present value is considered a gift potentially subject to gift tax.
For gift tax purposes, the remainder interest is estimated using rates listed in Section 7520 of the Tax Code. Currently, this rate is relatively low, so it is likely your trust will outperform those estimates. If it does, the excess earnings will be tax-free to your beneficiaries.
The TCJA did not affect charitable giving regulations directly, but it may affect your donation strategies going forward. If you would like to review your strategy, contact your CRI tax advisor today.