Time is running out for clients to lock in their charitable tax deduction for 2020
Back in 2018, many personal exemptions vanished including deductions for moving expenses, alimony, and unreimbursed employee expenses. In addition, a $10,000 cap on deductions for state and local taxes affected many people. As the dust settles from the election, it is hard to predict if the current, generous charitable deduction will remain untouched.
There are several ways you can help your clients reduce their tax burden and increase the money available to help those in need, especially during this terrible Covid crisis. Setting aside money in a year when a client has additional income from sources such as appreciated securities, a windfall from selling a business or an inheritance, is an opportune time to set-up a tax-efficient vehicle to make charitable giving more strategic.
The most commonly used vehicles are private foundations, charitable lead trusts, and donor advised funds. The environment is still quite favorable for CLATs, and this may be a good choice for a few clients. Many more clients can benefit from the increasingly popular donor advised fund. DAFs are the fastest-growing charitable vehicle, because they are the most flexible and efficient way to give. There are now 729,000 DAFs in the nation. Last year, $23.4 billion in grants were distributed from DAFs to charities in every sector, a distribution rate of 20%.
Regardless of how your clients give to charity, here are a couple of helpful suggestions:
- Donate appreciated long-term securities to maximize your tax savings. Clients can electronically transfer stock (DTC) to a 501(c) 3 public charity and receive an acknowledgement for a tax deduction. The client may claim a fair market value deduction up to 30% of adjusted gross income, and will not be subject to capital gains tax on the appreciated portion of the contribution.
- Give the most advantageous type of asset. There are so many ways to give to charity beyond writing a check or wiring cash. Do clients have appreciated securities, mutual funds, bonds, or cryptocurrency? Some charities, including JCF, accept these assets as well as real property, private stock, and other complex assets. By contributing low-basis complex assets, capital gains tax can be avoided.
Here are ways to help clients set up an easy to use, tax-efficient vehicle:
Make giving organized and tax-efficient with a donor advised fund. A donor advised fund (DAF) at JCF could help organize your clients’ charitable giving, and eliminate the worry of keeping records and saving receipts. Most DAFs are opened with a minimum contribution of $5,000, and typical fund sizes range from $50,000 to $1 million. Secure websites make managing charitable giving and making grants simple.
Use a DAF to Accelerate Giving Making a significant contribution now to a DAF by “bunching” what clients would have contributed to charities over the next two to three years can enable clients to reach the threshold to itemize their tax return and qualify for a maximum tax deduction. Once the DAF is established, fundholders have the flexibility to quickly and easily make grants to the IRS-qualified public charities in all sectors.
Terminate a Private Foundation Using a DAF. Eliminate the expense and burden of a private foundation. Transferring foundation assets to a DAF frees clients from the administrative and reporting requirements. Unlike private foundations, DAFs report in the aggregate, ensuring confidentiality and protecting fundholders’ privacy.
When clients contribute assets to open a DAF, they can take an immediate deduction and make grants over time. Some DAFs allow fundholders to choose investments options, and any earnings are added to their DAF tax-free.
DAFs can be managed on a secure website that provides access to account information and grant-making at any time. The DAF sponsor keeps track of all of the grants, eliminating receipts from multiple charities. Fundholders have the flexibility to set their own timetable for making grants to the IRS-qualified charities of their choosing. While grant-making activity is encouraged, most DAFs do not have an annual minimum distribution requirement. Therefore, the fund can last for several years before it would need to be replenished.
If clients are looking to maximize the impact of their giving, they should choose a donor advised fund that reflects their values. Jewish Communal Fund leverages the participation of their fund holders by making an annual major gift to UJA-Federation of NY. Additionally, our endowment, the Special Gifts Fund, makes grants to projects and organizations in the New York Jewish community such as support for kosher food pantries and services for the elderly. Furthermore, JCF offers mission aligned investments that reflect our Jewish values.
For an update on tax laws and more information about helping your clients with their charitable giving, check out JCF’s webinar on December 2 at noon featuring Lee M. Cohen, CPA and Ellen Israelson, V.P. of Philanthropic Services. Email [email protected] for webinar registration details.
Let Jewish Communal Fund help you and your clients. To learn more, visit JCFNY.org or contact Ellen Israelson.