2 Tax-Smart Charitable Giving Strategies for the New Tax Era

If Martin and Maria donated $50,000 to a donor-advised fund this year, instead of $10,000 per year, they still lose $9,400 of deductions this year, but they won’t lose $9,400 each year for five years. The donor-advised fund strategy would generate an additional $37,600 of usable deductions. If Martin and Maria were donating appreciated stock, they would save the capital gains tax as well.

It’s significantly more advantageous for Martin and Maria to add their contribution to a donor-advised fund. Their money still benefits the charity in the same way. Martin and Maria can specify that the donor-advised fund will distribute the money over a five-year period, or however long it lasts, depending on the investment earnings in the account.

Qualified Charitable Distribution

There are a lot of quirks in the U.S. tax code that can cause significant challenges. For instance, a withdrawal from an IRA counts toward an individual’s adjusted gross income. If that person donates that money, they get a deduction. But that donation doesn’t lower their adjusted gross income; it creates a below-the-line deduction. An artificially high adjusted gross income can create taxation on Social Security benefits and cause capital gains that would have been taxed in the zero percent bracket to become taxable in the 15% bracket.

A qualified charitable distribution can help Martin and Maria avoid these challenges. They can advise their IRA or their 401(k) to allocate the minimum distribution, or a portion of the minimum distribution, directly to the charity instead. Additionally, a qualified charitable distribution can help them avoid phase-outs of other deductions or artificially high Medicare premiums by helping them remain below the Medicare premium threshold.

The Hidden Value

Qualified charitable distributions and donor-advised funds are much more important now than they were before the tax overhaul, but the average American doesn’t know about these techniques or why they should use them. Clients are used to writing a check to their favorite charities and leaving it at that. You can offer guidance and help them become more strategic with their charitable giving, which will strengthen your relationship, build trust, and add additional value to their financial strategy.

— Related on ThinkAdvisor:

• Roth IRA Conversions: How Much Is Too Much?
• Unexpected Ways to Reduce RMDs, Optimize Retirement Cash Flow
• How New Tax Law Affects Investment Portfolios: The Advisor and the Quant

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Joe Elsasser, CFP, RHU, REBC, developed his Social Security Timing software in 2010 because, as a practicing financial advisor, he couldn’t find a Social Security tool that would help his clients make the best decision about when to elect their benefits. Inspired by the success of Social Security Timing, Joe founded Covisum, a financial tech company focused on creating a shared vision throughout the financial planning process.

In 2016, Covisum introduced Tax Clarity, which helps financial advisors show their clients the hidden effective marginal income tax rates that can significantly impact cash flow in retirement. In early 2017, Covisum acquired SmartRisk, software that allows advisors to model “what-if” scenarios with account positions and align a client’s risk tolerance with their portfolio risk.