November 26, 2018
Experts Corner

Still time for year-end charitable strategies

Paul M. Kuveke III

Tax and charitable planning in 2018 may be very different for Connecticut residents due to the Tax Cuts and Jobs Act (TCJA) of 2017.

The good news is that there is still time to take advantage of effective charitable-giving strategies.

One change to be aware of is the increase in the standard deduction to $12,000 for single filers and $24,000 for married people filing jointly. Along with this came a significant reduction in what could be itemized.

A second major change important for Connecticut residents is the new $10,000 limitation on deductions for state and local taxes (SALT). With high property and state income taxes, this new limitation means that fewer people will utilize itemized deductions when calculating their federal taxes.

Why is this important? Charitable deductions fall into the category of itemized deductions. If people use the standard deduction instead of itemizing, charitable contributions will not reduce their federal income taxes.

So, what are people doing to give to their favorite charities and take advantage of the new law? One concept is to bunch several years of future charitable contributions together and make a gift to a Donor Advised Fund (DAF). A DAF is a charitable account so the donation is treated as a completed gift for tax purposes.

People receive a tax deduction in the year a contribution is made and then they direct grants to charities of their choice over time. People who use this strategy will have higher charitable deductions in 2018 greater than the standard deduction limit so they can itemize.

In future years, they can then direct annual gifts from the DAF charities and not worry about itemizing. This is a win, win situation for the donor and the charity.

Under the new law, the deduction for donations of cash was increased to 60 percent of adjusted gross income (AGI). Deductions for donations of appreciated long-term capital gain assets remain the same at 30 percent of AGI.

If you plan to make larger-than-normal contributions in 2018 to be able to itemize, be careful not to exceed the annual 60 percent cash limit unless you will be able to itemize in future years too. Otherwise any carryover deductions may be wasted.

The most tax-valuable asset to gift to a charity is an appreciated asset. Many of our clients are Connecticut residents who work for public companies such as IBM, Praxair and Pepsi. Some have donated company stock to both DAFs and local charities producing significant tax savings. Many charities and DAFs accept contributions of non-cash assets including appreciated publicly traded securities, restricted stock, private equity and real estate.

Sometimes, a charity of your choosing can't operationally handle the donation of a complicated asset and a DAF can be used as a "conduit charity" to get the donation to the intended charity. While there are IRS limits to consider, the benefits of donating appreciated assets can be meaningful, including avoidance of capital gains taxes.

Another great idea for people over age 70.5 is to take advantage of a Qualified Charitable Distribution (QCD) from an IRA. Deductions up to $100,000 per year are allowed for direct contributions to a charity from the IRA. This donation must be made from an IRA and not from a 401(k) plan or other type of qualified retirement account.

This could be an excellent alternative for people who cannot fully take advantage of itemized deductions. A properly made donation can satisfy the person's required minimum distribution (RMD) while avoiding income taxes on normal distributions.

Paul M. Kuveke III is the director of private wealth at Procyon Partners LLC in Shelton.

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