By now it is old news that Donald Trump is our next president. Regardless of how you voted, or what your feelings are towards tax reform, you cannot hide from the fact that our tax code will likely be changing under the Trump administration. This creates a window of opportunity for donors during 2017. Here is a look at the proposed changes compared to our current tax code:
For many people, the new tax code will mean that they may find themselves in a lower tax bracket going into into 2018. So what does this mean for donors?
Well, if you fall into a lower tax bracket under the new administration then your donation will have less of a potential tax benefit. If you are in the highest tax bracket then you may be accustom to receiving a tax benefit of 39.6% for each dollar that you donate, this would fall to a 33% donation under the new administration.
At the current tax rate of 39.6% a $10,000 donation could put $3,960 back into your pocket if you claim the full tax deduction. After the new tax rates are in place, the same $10,000 would put $3,300 back into your pocket; a difference of $660.
It is important to keep in mind that once you are paying less taxes under the new structure that the $660 that you would have “lost out on” in our example is actually already in your pocket because you paid less taxes, so from this perspective it is a zero sum comparison. However, there is still an opportunity for donors to take take advantage of the transition from a higher tax bracket to a lower one.
The strategy is commonly referred to as “frontloading” in the planned giving space, and 2017 could be an ideal frontloading year.
By using a tool such as a Donor Advised Fund (DAF), or another charitable giving vehicle, donors can “prepay” their next several years worth of donations today while they are still in a higher tax bracket in an attempt to maximize the tax benefits for future year’s donations. So, rather than receiving a 33% deduction from our example the donor could potentially capture the higher 39.6% deduction by frontloading into a DAF and still not distribute their gift to their favorite charity until later years.
The frontloading strategy does have limitations. Annual charitable deductions are currently limited to a maximum of 50% of your adjusted gross income (AGI) per year in the U.S., so the amount of frontloading that you do will be limited to your AGI. However, this limitation is generally far beyond the average amount Americans give, even over multiple years, so the majority of people will likely not hit this limitation.
Additional strategies, such as donating appreciated stock instead of cash to avoid paying long term capital gains, can be used as a method of funding your frontloading strategy. This article has touched on the idea, but is just the tip of the iceberg when it comes to planned giving. If you are considering the frontloading strategy, be sure to talk with your professional advisor. This article is written for informational purposes only and is not intended to be tax advice.
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PIF Foundation does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.