The potential for Congress to pass a tax-cuts bill is shaping up to be good news for charitable organizations this year.
As Republican lawmakers work toward finalizing legislation to overhaul the U.S. tax code, taxpayers are eyeing ways to maximize their giving for 2017 before changes included in the tax bill could make it harder to get the biggest bang for their buck.
"We're having a lot of advisors and clients talk to us about bringing their giving forward, giving … enough money [this year] so they can maximize their tax deduction and fund multiple years of giving in the future," Kim Laughton, president of Schwab Charitable, told CNBC.
As it stands, both the Senate and House versions — whose differences lawmakers are working on reconciling — include provisions that could affect charitable-giving tax strategies.
For starters, while the deduction for charitable contributions is one of the few protected in the tax bill, fewer taxpayers would likely use it. That's because the standard deduction also would nearly double, meaning fewer households would itemize — which is the only way to take advantage of the deduction for charitable contributions.
One way to prepare for that would be to combine two years' worth of gifts into one.
"We're going to see more 'bunching' of deductions," said Kim Garcia, a principal with Diversified Trust in Greensboro, North Carolina. "Instead of making gifts in two separate years, we might start seeing people doing it every other year to have a higher amount contributed in one year to get them over the [standard deduction] threshold."
While charitable contributions are generally limited to 50 percent of adjusted gross income, you can carry over to next year — and up to five years — any amount that exceeds the limit.
Another proposed change in the Senate tax legislation (but not in the House version) would affect the sale of stock, which might make it more beneficial to gift shares this year.
Under current law, investors with taxable brokerage accounts have several choices when putting in a sell order for stock shares: They can direct their broker to sell the oldest shares first (the first-in-first-out, or FIFO, method) or direct the sale of shares that were purchased on a particular date (specific identification method). Those same choices apply when identifying shares to gift.
The Senate bill's provision eliminates the specific identification method. Stock investors would be required to divest their oldest shares first regardless of whether those shares come with the lowest cost basis.
"The reason for gifting low-basis stock is to avoid the capital gains on that asset," Garcia said. "So if you have tax lots out there with a low basis, it's better to gift it to charity now while you can specifically identify them."
When gifting stock, you get to write off the value of the donation, along with paying no tax on the gains. (If congressional efforts to change tax law fail, no harm will be done because you can still carry over any amount you can't write off this year.)
The charity also benefits when you gift stock.
"Appreciated assets make particularly good charitable gifts, because when you give [them] to a charity … the charity doesn't have to pay capital gains tax on the sale of those assets," Schwab Charitable's Laughton said.
Keep in mind that if you choose to use a donor-advised fund to manage your charitable giving, the same carry-over rules apply.
A donor-advised fund is an account dedicated to holding charitable dollars until they are distributed. You can give either cash or appreciated investments to the fund and take a tax deduction for that contribution in the year you make the gift. You then can use the fund's assets to give to charities of your choice over time.
Beyond those strategies, here are some tips to keep in mind while deciding where to direct your donations:
For your generosity to count against your taxes, donations must go to tax-exempt organizations. These include 501(c)(3) nonprofits, churches and other religious organization, among others. You cannot deduct contributions made to individuals or political organizations or candidates.
To use your charitable contributions against your taxes, you must itemize your deductions. This means that, for it to make financial sense, the combined value of all your deductions would need to exceed the standard deductions for 2017: $12,700 for married couples, $9,350 for heads of households and $6,350 for single filers and married couples filing separately.
Generally speaking, your total charitable contributions are deductible up to 50 percent of your adjusted gross income. For high earners — i.e., those with 2017 adjusted gross income of $261,500 or more, for single filers, and $313,800 for married couples filing jointly — so-called Pease limitations could cap the value of your deductions further.
Regardless of the amount, you must be able to substantiate both cash and non-cash donations. For contributions worth $250 or more, you need written acknowledgement of the gift from the recipient organization. Donations of non-cash items worth $5,000 or more require a professional appraisal. While you do not file these records with your tax return, you must be able to produce them if you are audited.
Unless you're carrying over an outsized charitable donation (see rules above), you can only take a deduction for a charitable donation for the year in which you made it. This means that if you want to use certain contributions against your 2017 taxes, you generally have until Dec. 31 to get it done. For gifts of stock or other assets held at a brokerage, the date the trade is executed is typically the official date of the gift.
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