Tips to Claim Donations Under New Tax Law: “Pooling”

Jan 22 • Financial Planning • 603 Views • No Comments on Tips to Claim Donations Under New Tax Law: “Pooling”

By Joni Lindquist

At KHC Wealth Management, we’ve done some digging into the new tax law and how it will affect the various aspects of one’s financial life.  One of the apparent benefits of the new tax law is a simplified and higher standard deduction for taxpayers.  Standard deductions are doubled while exemptions are eliminated. Standard deductions are subtracted from taxable income, lowering the amount you are taxed on.  For families, the standard deduction will rise to $24,000 and for individuals will rise to $12,000.   It is estimated that 90 percent of taxpayers1 will not have enough itemized deductions to exceed the standard deduction.  This will make charitable contributions non- deductible, thus discouraging people from making charitable contributions.

For those who routinely donate to charities, you may want to consider a “pooling” strategy.  This involves moving two or more years of your typical donations into one year to exceed the standard deduction.  Then, the following year, you do not donate and use the standard deduction.  Participation will depend on whether you can afford to do the pooling given your cash flow.

On the other hand, many charitable organizations survive month to month on tight budgets and seek annual donations.  One way to receive the tax benefits of pooling and still provide annual gifts is to use a Donor Advised Fund (DAF).

I personally have funded and use a Donor Advised Fund for years and have helped clients set up their own.  Here’s how they work:

You can establish a DAF with various custodians, including local organizations like Greater Kansas City Charitable Foundation, or national organizations like Raymond James Charitable Foundation and Fidelity Charitable. Most typically require a minimum, for example $5,000 to open your fund.

You can contribute cash and securities, such as highly appreciated stock to your fund.  You claim the donation on your taxes in the year you contributed to your DAF.  With a pooling strategy, you’d contribute several years into the fund in one year, say 2018.  You would claim it on taxes for 2018.  Then, you can distribute the money to your designated charities annually in 2018 and 2019.  This strategy allows you to control how much and to which charities you direct funds.  The organizations must be taxable charities.

Another benefit of the DAF is they are invested and will continue to grow if the markets are growing.  There are costs, usually an administrative fee and investment fees around 1 percent a year, paid to the organization to maintain and invest your fund.

Every situation is unique and depends on your income, cash flow, life goals and charitable goals now and in the future.  For help with tax planning under the new law for your specific situation, please contact me by clicking below to schedule a meeting, email jlindquist@makinglifecount.com, or call (913) 345-1881.

1 Michael Kitces, Presentation to Kansas City Financial Planning Association, January 17,2018

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