Dana Sippel, CFP®, CPA/PFS

Dana Sippel, CFP®, CPA/PFS

When it comes to sailing, it is essential to always make sure all of the lines are secured. They need to be checked, double checked, even triple checked, to ensure a safe voyage. It is this kind of precision and attention to detail that make Dana Sippel not only an exceptional sailor, but has led him to build an experienced career in wealth management.

New laws for 2018 tax returns resulted in only 8% of taxpayers itemizing their deductions 1. This means that the remaining 92% of Americans no longer receive any tax benefits for their charitable contributions.  This article shows how to recapture lost tax deductions for charitable contributions.

First, a couple of facts on tax deductions: for 2019 a married couple filing a joint tax return receives a $24,400 Standard Deduction.  There is an additional Standard Deduction amount for those who are blind or over age 65.  This effectively means that if your total itemized deductions do not exceed your Standard Deduction of $24,400, you will not itemize deductions and receive no tax benefits for any deductions.

Let’s see how this works.  Mr. & Mrs. Smith, each age 55, earn a combined income of $400,000, have paid off their home mortgages, pay $10,000 in real estate taxes and $23,000 in state income taxes.  They also give $10,000 a year to their favorite charities.  They have no large medical expenses and no other debts.  Here’s the math on the Smiths’ deductions:

[table id=14 /]

For 2019, the Smiths will take the $24,400 standard deduction since it is higher than their $20,000 of itemized deductions.  Under this scenario, the Smiths receive no tax benefit for their charitable contributions since their total itemized deductions did not exceed their $24,400 standard deduction.  Note also that the new tax law limits (SALT) deductions to $10,000.

Here’s how to change the math using a Donor Advised Fund (DAF) and bunching of deductions.  A DAF is simply a charitable account that is setup, funded and controlled by the donee.  Most of the major asset custodians and brokerage houses have DAF accounts available. Here are more details on how DAFs work: https://www.schwabcharitable.org/public/charitable/home or https://www.fidelitycharitable.org/.

To see one in action, let’s revisit the Smiths’ situation.  In 2019, they make a $50,000 contribution to their DAF.  They receive an immediate charitable contribution deduction for the full value of their contribution to their DAF.  Here’s how their 2019 deductions look under this scenario:

[table id=15 /]

Under this scenario, the Smiths have converted $35,600 of their $50,000 in charitable contributions to be tax deductible.  The Smiths then make their normal annual $10,000 of charitable contributions from their DAF.  Following this strategy results in a charitable deduction in the funding year, but no further charitable deductions in subsequent years, as the funds are distributed to the charities.  Note that there are some limitations on the amount of charitable contributions that can be deducted each year; see the IRS rules on charitable contributions here: https://www.irs.gov/publications/p526.

While the above strategy is a huge improvement, there’s even more that can be done to improve the tax benefits.  If you own appreciated securities, the strategy can be further enhanced.  Let’s continue with the Smiths, who hold Apple stock that was purchased for $1,000 when it went public in 1980.  The stock is now worth $200,000.   If they choose to gift Apple stock rather than cash to their DAF, they receive the additional tax benefits of escaping capital gains taxes on the sale of Apple stock.  Here how the math on this transaction works:

[table id=16 /]

If the Smiths follow this plan, they receive double tax savings: 1) avoiding the capital gains related taxes on the sale of Apple shares; and 2) bunching their charitable contributions into one tax year to create additional Itemized Deductions.  Assuming that the Smiths contribute $50,000 in year one, then distribute $10,000 annually to their favorite charities, they would repeat the funding/deduction cycle in year six.

As you can see from the above examples, there are still several tax advantaged strategies useful for stretching gifts to charities.  For those taking Required Minimum Distributions from their IRAs, here’s another tax favored gifting strategy: https://glassmanwealth.wpenginepowered.com/blog/give-charitable-gifts-avoid-tax/.

Please contact us if you would like further information on these or other smart gifting strategies.



1 – IRS Estimates

2 – Long-Term Capital Gains tax, Net Investment Income Tax and State Income Tax