Bunching, IRA Rollover Gifts May Allow Donors to Maintain Charitable Giving Levels Despite the New Tax Climate

by Sarah Weaver, JD,
senior gift planning advisor at CICF

With the passage of the Tax Cuts and Jobs Act (“TCJA”) in December of 2017, many are speculating about the impact the law will have on charitable giving. Because the standard deduction was nearly doubled, $12,000 for individuals and $24,000 for married couples, the Tax Policy Center projects that only 11 percent of households will continue to itemize their tax deductions, down from 26 percent of households under the prior law. With such a dramatic decline in the number of itemizing households, it is possible, even likely, that charitable giving nationally will decrease in 2018 because non-itemizing households do not benefit from the charitable income tax deduction. On the other hand, wealthier individuals and those that continue to itemize may have more incentive to give under the TCJA. Regardless of your clients’ situations, understanding their options for charitable giving can provide substantial value and ensure they can continue to be charitable in an intentional, tax-smart way.

Incentives to give under the TCJA

For the most generous donors, the TCJA provides new incentives to increase charitable giving:

  • The adjusted gross income limitation for charitable gifts of cash that can be deducted in any particular year has been increased from 50 percent to 60 percent.
  • The Pease limitation on itemized deductions, whereby an otherwise allowable amount of certain itemized deductions was reduced by 3 percent of the amount of a taxpayer’s adjusted gross income exceeding a threshold amount, has been suspended through 2025.
  • The expansion of the exemption of the alternative minimum tax means that fewer wealthy taxpayers will be subject to alternative minimum tax. As the alternative minimum tax structure makes charitable giving less advantageous than the non-alternative minimum tax structure, fewer individuals subject to alternative minimum tax should benefit charitable giving generally.

These donors may find that they have even more capacity to give in light of these changes. Additionally, the charitable income tax deduction remains unchanged, so for donors who will continue to itemize regardless of the increased standard deduction, charitable giving should stay constant or possibly even increase.

Bunching Charitable Contributions

For the rest of the charitable giving population, there are ways to maintain current levels of charitable giving despite the doubled standard deduction. One solution gaining popularity is the concept of “bunching” through the use of a donor-advised fund. Bunching permits a donor to (1) contribute two or more years’ worth of donations to a donor-advised fund, (2) itemize his or her tax deductions for that year and receive the charitable income tax deduction for the full amount contributed, and then (3) grant money from the fund out to the donor’s favorite charities over the desired number of years. In the subsequent years after the initial contribution is made, the donor then takes the standard deduction.

With a donor-advised fund, the fund’s administrator legally holds and controls the funds once contributed, but the donor recommends grants from the fund: the charity to which it should be directed, the amount of the grant, and the timing. Because most donor-advised funds have few or no requirements as to when the funds must be spent out from a donor-advised fund, donors have the flexibility to spread out gifts from the fund over any time period. Moreover, as concerns arise around a decline in charitable contributions, bunching through donor-advised funds may help ensure that non-profit organizations continue to see consistent annual contributions.

Central Indiana Community Foundation’s donor-advised funds are an excellent vehicle for bunching. Not only do donors receive the benefit of the strategic charitable income tax deduction, but CICF’s philanthropic advising team also works with donors to ensure their philanthropy is as impactful and meaningful as possible. Furthermore, donors can contribute virtually any asset to their donor-advised fund. With the stock market continuing to perform extraordinarily well, many donors have found donating appreciated securities particularly attractive. In addition to receiving the tax benefit of the bunching strategy, donors of appreciated securities also avoid the payment of capital gains tax on the realized gain.

Utilizing the IRA Charitable Rollover

For older donors who will not itemize under the TCJA (and even for those who will), the IRA charitable rollover is an excellent tool to help them maintain their charitable giving. For clients who are at least 70½, they can transfer up to $100,000—$200,000 for a married couple—of their IRA assets directly to a qualified public charity. Since the transferred assets are not recognized as income, the donation will not trigger federal income tax obligations today or estate tax obligations in the future.

It is important to note that clients utilizing the IRA charitable rollover cannot make their contribution to a new or existing donor-advised fund. However, CICF has a number of fund types to which an IRA rollover gift can be made, two of which function very similarly to a donor-advised fund and were created specifically to accept IRA charitable rollover contributions. You can find out more about those options here.

Contact Us to Learn More

If your client already has a donor-advised fund with CICF or its affiliates, we would be happy to help them make a “bunched” contribution to their existing fund. If your clients are interested in learning more about how they can start a donor-advised fund with CICF or its affiliates in order to take advantage of bunching their charitable contributions, we are here as a resource for you. And if we can answer any questions about IRA charitable rollovers, please reach out. Call Mary Stanley, director of charitable gift planning and legal affairs, at 317.634.2423, ext. 319 or Sarah Weaver, senior gift planning advisor, at 317.634.2423, ext. 510.

This article is provided for informational purposes only and should not be construed as legal or financial advice. Each individual’s situation is unique, so before making any decisions around charitable giving, including those discussed herein, you should consult your own legal and financial advisors.

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