November 21, 2017 / 5:25 PM / 2 years ago

Your Money: Gear up for a big year of giving

CHICAGO (Reuters) - If proposed tax overhaul changes are adopted, giving to charity for tax reasons will no longer be as valuable for most people as it is this year.

Saks Fifth Avenue's holiday light show can be seen on display in the Manhattan borough of New York, U.S., November 27, 2016. REUTERS/Darren Ornitz

So advisers are pushing clients to rush before year-end to give large donations before opportunities to maximize tax-cuts run out.

Neither of the proposals currently on the table from Congress eliminate the deduction for charitable contributions, but both plans from the U.S. House of Representatives and the Senate increase the standard deduction so much that many people will no longer itemize their returns, said Robert Keebler, of tax advisory firm Keebler & Associates.

The Tax Policy Center think tank estimates that only 5 percent of people will itemize compared with about 30 percent now. Even a taxpayer who does still itemize might see less value because of tax bracket changes.

Earlier this year, the center ran the numbers on possible shift from a high rate of 39.6 percent to 33 percent. For a typical wealthy taxpayer with the top tax rate of 39.6 percent, every $100 of donation now has an after-tax cost of $60.40 because of the value of the deduction.

But if a taxpayer were to fall from the current top rate to 33 percent, the after-tax cost for the taxpayer would be $67. Currently, the plans for tax brackets vary considerably in the House and Senate, with the 39.6 percent bracket still in the House version, but with different income thresholds.

No matter what happens, the consequences could be dire for organizations that depend on donors. The Lilly Family School of Philanthropy at Indiana University estimated in May that charitable contributions could fall about $13 billion because of tax overhaul.

With the possibility that the tax laws might change, an easy way to make a large donation quickly in the last month of this year is to use a donor-advised fund, said Keebler. These are accounts you can create at a financial institution like Fidelity or Vanguard that allow you to set the money aside for charity and claim the tax deduction, but then hold off on actually giving away until a later date. People with windfalls often give large donations during a year of extraordinary gains, but also often use the funds for regular giving to build up a big balance over time.

Financial adviser Megan Gorman of San Francisco has been using a donor-advised fund for years, and is coaching clients now on how to maximize the value as the tax overhaul negotiations keep churning.

She and her husband began slowly, first putting $5,000 into a Schwab donor-advised fund that would let them give gifts as small as $500 over many years to any charitable organization that appealed to them. Their first was an AIDS education charity; later came a charity that delivers fresh fruit and vegetables to struggling seniors.

Each year, they increased the sum in their Schwab fund as they became more comfortable with the process of selecting charities and cutting their taxes by using the deduction for charitable contributions.

While people may be too busy in 2017 to choose charities, Gorman says a simple approach is to put $5,000, which is usually the minimum to start an account, and then dole it out at a later time.

Choosing a firm where you already have investments makes the process of moving money from an existing account into a charitable account simple, said Gorman. She advocates donating a stock or fund that has appreciated so much that it may decline, or an investment that has become an oversized portion of your portfolio.

The individual simply donates that asset to the donor fund, the fund managers sell it with no tax consequence. The individual gets the entire value of the asset as a tax deduction in 2017. 

“This is really fun to do. Many clients decide on charities as a family project,” said Gorman.

This year Gorman is planning a massive donation so she can maximize her tax reduction and commit a large chunk to Napa fire victims, after seeing her friends lose homes.

Editing by Beth Pinsker and Jonathan Oatis

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