Tax-Smart Giving StrategiesSeptember 19, 2019
- Tax deductions are important to consider when developing a financial strategy around making charitable contributions.
- Careful planning and donating in a tax-efficient manner could help increase the amount you are able to donate.
- Take the time to evaluate how your existing charitable strategies could be adjusted to be more beneficial as a result of the 2017 tax cuts.
Earlier this year, taxpayers were able to experience firsthand how the 2017 Tax Cuts and Jobs Act directly impacted their 2018 tax filing—and in particular their deductions. The standard deduction amount was increased, and it is likely that many filers found this to be the most beneficial option, even if they had typically itemized their deductions in the past. In switching to the standard deduction, donors may not have been able to claim any charitable contributions they made during 2018.
“Americans appear to be as committed as ever to giving,” says Dr. John Brothers, president of T. Rowe Price Charitable.1 “But the strategies they’ve used to donate efficiently in the past may benefit from adjustments due to the new tax landscape.”
A strategic approach
Donors typically have a strong commitment to philanthropy and a desire to support the causes that are most meaningful to them, whether they include education, the environment, the arts, or any number of other worthwhile causes. But tax deductions are important to consider when developing a financial strategy around making charitable contributions. Donors can still claim a deduction equal to the fair market value of any long-term appreciated securities they contribute. This means you can support your favorite nonprofits while avoiding potentially significant capital gains taxes.
What’s more, careful planning and donating in a tax-efficient manner could help increase the amount you are able to donate. One strategy could include combining two years’ worth of contributions into one tax year, perhaps at the start or the end of the calendar year, which could result in a higher total itemized deduction for the donor in that year. Then, in the following year, donors could elect to receive the standard deduction instead. The total donation amount wouldn’t change, but this strategy would allow donors to take full advantage of any tax deductions.
Consider the following ways the new laws have influenced charitable giving.
|Positive Impacts||Negative Impacts|
Higher limits for cash donations.
Lower tax rates.
Lower corporate tax rates.
No Pease limits.
Carryforwards still apply.
Higher standard deduction.
Limits on other deductions.
Exploring donor-advised funds
Another option to consider is a donor-advised fund (DAF). DAFs are public charities that accept irrevocable gifts of cash or appreciated noncash assets from individuals and then distribute these funds to qualified nonprofit organizations, per the donor’s recommendation. One particular benefit of using a DAF for your charitable giving is that it will allow you to accelerate multiple years of giving into one tax year, along with the option to spread out distributions to charities over multiple years.2 In the meantime, any balance in your DAF account has the potential for tax-free growth, resulting in even more funds for your favorite charities.
DAFs assist donors with everything from facilitating the liquidation of appreciated noncash assets3 (to potentially eliminate capital gains tax liability) to handling administrative tasks, such as recordkeeping. The structure is typically more cost-efficient and less time-consuming than establishing a private foundation, and DAFs still make it possible to involve additional family members to develop a multi-generational approach to philanthropy.
Charitable giving remains a core value for many American families.- Dr. John Brothers, President of T. Rowe Price Charitable
Make any adjustments
With just a few months left before the traditional year-end giving season, take the time to evaluate how your existing charitable strategies could be adjusted to be more beneficial as a result of the 2017 tax cuts. “Charitable giving remains a core value for many American families,” says Brothers. “As tax laws change, tax-related gifting strategies may need to be adjusted. But the values and philanthropic legacy will persist.”
1T. Rowe Price Charitable is an independent, nonprofit corporation and donor-advised fund founded by T. Rowe Price to assist individuals with planning and managing their charitable giving.
2You will not receive a second charitable deduction at the time a grant is made from your DAF.
3Examples include publicly traded securities, private stock, business interests, real estate, etc.
This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
- Learn more about T. Rowe Price Charitable.