A young man called me up the other day, wanting to learn more about opening up a charitable giving vehicle called a donor advised fund. He works for a Jewish nonprofit, and isn’t particularly wealthy. But in light of the tax bill that passed in the Senate, he told me that he wanted to accelerate his charitable contributions into 2017. That way, he can claim a tax deduction on his 2017 tax return—while the tax deduction is worth more than it may be in the future due to changes in marginal tax brackets—but also retain the flexibility to distribute checks to IRS-qualified public charities over the next year or longer. In the meantime, the assets in his charitable fund can be invested and grow tax-free.
Opening a donor advised fund (DAF) is a smart move you may want to take advantage of, too. But time is running out – you only have until the end of December to get a charitable tax deduction for 2017. A DAF enables you to get a tax deduction when you need it, while giving you time to be thoughtful about which charities to support, on your own timetable.
Tax Reform Basics
While the details of the final tax bill have yet to be finalized as of this writing, many frum households living in the Bergen County area may be adversely affected by the tax overhaul—particularly those who have large families and higher-than-average property taxes. The Senate bill caps property tax deductions at $10,000 a year, and removes the state and local income tax deduction. The mortgage interest deduction may be limited as well. The Senate bill also gets rid of the personal exemptions (currently a deduction of $4,050 for yourself, your spouse, and each of your dependents). Instead, the standard deduction may be increased to $24,000 for married couples.
One result of the tax bill—if passed into law—is that far fewer families will itemize on their taxes in 2018. The Tax Policy Center estimates that the number of Americans who will itemize will decrease from about one-third to only 5%. This is an issue when it comes to charitable giving because the only way to claim a tax deduction for charitable contributions is to itemize. When non-itemizers donate $100 to charity, there is no impact on their taxes. But for itemizers in the 25% tax bracket, the government essentially gives them back $25 for every $100 they donate to charity. As a result, the $100 charitable contribution ends up costing them only $75.
If you have the means to set aside your charitable contributions for 2018 now (think of shul membership dues, High Holiday seats, etc.), you’ll be able to maximize the tax deduction for 2017 without worrying about potential changes in 2018. A donor advised fund makes this easy to do so, enabling you to contribute to the charitable fund now and take an immediate tax deduction. Then, you can log into your account and, with just a few clicks, send checks out to support your favorite charities easily and simply.
An Even Smarter Way to Give
With the stock market at record highs, an even smarter way to give to charity is to open a donor advised fund using long-term, appreciated securities—stocks you have owned for more than a year that have since gone up in value. When you gift appreciated securities to Jewish Communal Fund or another donor advised fund, you can claim a tax deduction in the year of the gift for the fair market value of the stock on the date JCF receives the gift. Plus, you don’t have to pay capital gains tax. So if you bought stock at $30 a share and it’s now worth $100 a share, you’ll get a donation receipt for $100 and avoid paying taxes on the $70 in gains.
With the market at all-time highs, 2017 is an especially good year for making a contribution of highly appreciated securities.
The Universal Charitable Deduction
Many in the nonprofit sector are lobbying Congress to make the charitable deduction a “universal deduction” that can be claimed on top of the standard deduction, even for those who don’t itemize. Congressman Mark Walker (R-NC) has introduced legislation to create this universal charitable deduction, which would expand the charitable deduction to all Americans, and not only the wealthy who itemize. Without such legislation, some experts project that charitable giving may fall by as much as $13 billion as an unintended consequence of doubling the standard deduction.
The Bottom Line
With the details of the tax overhaul still uncertain, it’s a smart move to pre-pay your charitable contributions in December and lock in the generous tax deduction for 2017, while you still can.
Disclaimer: This article is not intended as tax advice. Please consult with your accountant or other tax professional before taking any action.
By Tamar Snyder
Tamar Snyder is the Director of Marketing & Communications at the Jewish Communal Fund (www.jcfny.org), the largest and most active Jewish donor advised fund in the country. Contact Tamar at [email protected].