As you know, the 2017 Tax Reform bill contains many changes to previous tax rules and rates. This is a summary of how the changes affect charitable giving to public charities, like FHFH. Consult your local tax professional to determine how the new rules impact your particular situation.
Surveys of donors consistently reveal that most donors to 501(c) 3 public charities do so from the heart, not the wallet. Only about 5% of respondents say they would modify their charitable giving strategies if the tax benefits were removed. How they respond to a survey may be a bit different than the reality of how they really behave. If accurate, this would suggest that public charities should not be worried about future donor contributions drying up as a result of the recent tax changes. That said, let’s focus on the recent changes and possible donor strategies.
Cash donations to public charities (501(c) 3 orgs) can now be deducted up to 60% of AGI – Adjusted Gross Income, with five more years of carry forward if needed. The old limit was 50%. Under the new tax rules, many of the families who filed a Schedule A tax form, thereby benefiting from their charitable contributions, will no longer need to file Schedule A. So how can these impacted donors achieve a tax benefit from future charitable contributions? One strategy is to use a DAF – Donor Advised Fund. This is the “bunching” strategy. Suppose a family gives $5,000 each year to variety of charities by sending each of them a check. Assume they can no longer deduct the gifts because they no longer benefit from filing Schedule A. They could open a DAF with a one-time gift of $50,000. The entire gift of $50,000 is deductible in the tax year that they fund their DAF. Each year they simply ask the DAF fund to distribute funds to their favorite charities, just as they have sent checks in the past.
Another neat strategy works for IRA owners who must take RMD – required minimum distributions starting at age 70 ½. New tax rules allow the IRA owner to instruct the IRA custodian to send funds from the IRA directly to a qualified public charity, up to $100,000 each year. This is the only way an IRA owner can disclaim the RMD income and avoid income taxes. The donor achieves their charitable intent and lowers their taxable income. America has always been the most benevolent country on planet earth. Continue to talk with current and potential donors about the importance of making a difference by supporting FHFH with their time, talent and treasure.
Mike Handrick does not provide tax or legal advice. Always consult your professionals.
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