Christians should be generous. In fact, Christians should give more than non-believers since our security is not in money and savings. We should give as we are led by God while focusing on good stewardship of our resources.
Our goal should be a giving that maximizes the resources available for ministry by the charities we support while providing those resources in the most efficient manner, providing us the ability to give more.
We will explore some general concepts to be good stewards in our giving and discuss some implications of the new tax law.
Alternative Giving options
Most charitable donations occur via the direct payment of currency in some form to the church. Some alternatives to traditional giving are as follows:
Donating appreciated assets
Donating appreciated assets has been described as a strategic way to give; a 100% win-win. The tax code provides economic benefits for donating appreciated assets, including stocks, bonds, land, and collectibles. In all cases, the donor must be able to prove the value of the asset at the time of the gift, either by having proof of market value (if readily traded) or an appraisal of the asset. The benefits of giving appreciated assets are best seen in the following example:
Donor purchased stock of a public company five years ago for $12,000. The stock is now worth $20,000, a gain of $8,000. If the stock is sold, the taxpayer will owe capital gains taxes of 15% (for most taxpayers), or $1,200 (15% times the $8,000 gain in value). After paying taxes, the taxpayer has $18,200 to donate to the church, with a potential (the word potential will be used consistently in these examples; see new tax law section below) tax deduction of that amount. If, however, the stock is donated directly to the church/charity, no tax is ever required on the gain in value and the entire $20,000 is allowed as a potential charitable deduction and for use by the charity.
Directing Required Minimum Distributions
Required Minimum Distributions (RMD’s) from Individual Retirement Accounts are mandated by the IRS after the taxpayer reaches the age of 70 ½. The tax code allows the taxpayer to have all or a portion of the RMD made directly to a charitable organization. Not all IRA custodians will initiate these transactions but, if they will, the direct payment to the organization allows the taxpayer to meet RMD requirements while excluding the payment to the organization from their taxable income. Again, the funds are sent directly to the organization in the name of the taxpayer. The funds sent to the organization are NOT counted as a charitable donation; instead, the gift is never included in the taxable income of the taxpayer. Exclusion of these amounts from income may allow the taxpayer to earn more without impacting social security taxability and has other potential benefits that are described below.
Example: Taxpayer’s RMD is $20,000. They don’t need the cash to live but are taking the distribution because it is required. They have $10,000 sent directly to charity and $10,000 is received by them. Only $10,000 is reported as taxable income, with no other reporting required.
This technique allows a donor to open a fund at little to no cost with an investment firm (such as Fidelity, Schwab, Vanguard, etc.). You can open these accounts online in just a few minutes with little effort and take advantage of tax savings opportunities that were only available to the very wealthy just a few years ago. After opening the account, the donor contributes cash or appreciated securities to the fund, giving up ownership of the assets to the fund custodian. Like donating appreciated securities above, the donor receives an immediate donation for the value of the assets moved. The donor chooses among investment options and invests the amounts contributed, with any earnings increasing the amount ultimately available to contribute to charities. The donor instructs the custodian to make direct donations to charitable organizations in the amounts and when they desire. Benefits of using this fund will be described more below in the new tax law section. Note: the transfer of assets to the fund allows a potential tax deduction for that amount even if nothing is distributed to charities in the year of transfer.
Implications of the New Tax Law
The new tax law made many changes that will impact the tax returns of those who make charitable contributions.
Arguably, the most important change for most consumers was the elimination of the personal exemption and large increases in standard deductions.
Without going into all the details of the different amounts, we will focus on the married filing jointly situation where the new standard deduction is $24,000. Every situation is different but assumes a couple has mortgage interest of $6,000, state and local taxes (including property taxes) of $8,000 and charitable contributions of $9,500. Those total $23,500. In this example, the couple would not itemize deductions as they have in the past and would simply take the standard deduction.
The result is much less complexity and record keeping but may also lead to the realization that none of those expenses created a tax deduction. These changes may create a surprise for many taxpayers, especially as they prepare their taxes in 2019 for the first time under the new law. How do the items listed above impact the new tax law?
- Appreciated assets. There is no change in the rules, but the contributions may need to be greater than in the past to receive an itemized deduction.
- Directed RMD’s. Since the RMD funds are sent directly to the charitable organization and are excluded from the reporting of taxable income, there is no concern about a contribution that isn’t deductible. The funds are available to the organization and the taxpayer gets the full benefit by a reduction of their taxable income.
- Donor-Advised Funds. This technique is probably the biggest consideration for taxpayers as it allows them to “bunch” contributions for the tax return and give regular distributions to charities. The mechanics are best seen through this example:
Assume a couple generally contributes $10,000 a year to various organizations. The couple’s total expenses that qualify for itemized deductions are less than or equal to $24,000, the amount of the standard deduction. Therefore, there is no tax return benefit to the deductions or any of the other expenses.
Instead, the couple opens a donor-advised fund and transfers $30,000 of appreciated securities in year one. That transfer of securities, plus other deductible itemized expenses will be deductible as they exceed the $24,000 standard deduction. In year one, the taxpayer may instruct that some portion be donated to various sources. No deduction is received for that contribution since the entire $30,000 has been deducted. The remainder will be invested as the taxpayer desires. (As noted above, the direct donation in year one is totally at the option of the taxpayer and is not required).
In years 2 and 3, the taxpayer instructs the fund to make contributions of any amount each year to charities. These contributions are not deductible in these years as they were deducted in year 1. Note: earnings are ignored in this example, but they can also be transferred. These earnings will never be reported as taxable earnings, nor will they be considered charitable contributions by the donor. They are, however, additional funds, available for use by the charities.
In year 1, the taxpayer received $30,000 of charitable contribution tax deductions that can be combined with the other deductible items in that year. If the taxpayer had donated $10,000 (even if it was with appreciated securities) in each of the three years, no deduction would be received in any of the 3 years. Over three years, the charity receives the exact same funding while the donor maximizes the tax benefits received over the timeframe.
A taxpayer would receive the same tax benefits by giving $30,000 directly in one year and none the next two years but the impact on charities of givers not providing consistent support would be devastating to their planning and ministries. The donor-advised fund increases stewardship by providing the best of both worlds: maximizing tax deductions while providing consistent, recurring funding to the charity.
Christians do not give to receive tax deductions but taking advantage of IRS rules allows the Christian to be a good steward by maximizing the tax deductions by the donor and the benefits to charitable organizations.
Particularly, using the rules to “bunch” deductions as much as possible will enhance stewardship while providing consistent funds to charities.
Note: While the information in this article is believed to be accurate at this time, we suggest contacting a tax advisor or obtaining professional advice to discuss your actual situation.
By Tommy Warren – Finance Team Member