You know Dasher and Dancer and Prancer and… well pretty much every other holiday character that ever existed, but have you heard of Belsnickel? For those unfamiliar with Pennsylvania Dutch folklore, Belsnickel is a companion of Saint Nicholas tasked with weeding out the naughty and nice children. Nice children are given candy, naughty children get switched until they’re nice. Admittedly he’s not the nicest Christmas character.
As 2019 draws to a close, a different kind of Belsnickel looms large right after the holiday, the Internal Revenue Service. It’s almost impossible to avoid the IRS switch, no matter how nice you are, but with a little tax planning, perhaps you can lessen the pain from the IRS Belsnickel come April 15, 2020.
Following passage of the Tax Cuts and Jobs Act, a number of valuable tax planning channels were mitigated or eliminated due to various suspensions and caps being levied on certain itemized deductions. However, there may still be some opportunities to reduce your tax burden through planned charitable gifting. Below are our thoughts on some gifting strategies that might make sense before the close of 2019:
- Bunching – the practice of making several years’ worth of contributions in a single year. From a tax perspective, it’s better to lump several years of giving together into a single super-sized gift and nothing in subsequent years, as opposed to smaller annual gifts.
- Donor advised funds (“DAFs”)/Private foundations (“PFs”) – For taxpayers who like the idea of bunching, but don’t like the “feast or famine” concept of gifting, DAFs and PFs are potential alternatives. The full value of the contribution to a DAF or PF is potentially deductible in year one, while smaller disbursements can be made to a charity over subsequent years.
- Qualified charitable distributions – For taxpayers at least age 70 1/2, direct charitable rollovers are a great option for moving money out of an IRA or 401(k) plan. Typically, these distributions are taxable income to the recipient when withdrawn, but, if done correctly, a qualified charitable contribution allows the taxpayer to divert up to $100,000 directly to a charity and not recognize the income on their tax return. While this means there is no charitable deduction, the taxpayer avoids picking up the taxable income in the first place.
- Donate appreciated securities – Since the Great Recession in 2008, the Dow Jones Industrial Average has increased by roughly 285%, meaning some taxpayers could be sitting on significant taxable income when they sell those securities. Taxpayers who donate appreciated securities to charitable organizations do not recognize any of that gain, though, and get a charitable contribution equal to the fair market of the value of the security on the day of donation. This means that a taxpayer who bought a stock for $1,000 that appreciated in value to $4,000, could receive a $4,000 charitable deduction for their original $1,000 purchase.
- Charitable trusts – Charitable trusts are unique in that they give the taxpayer a charitable deduction today for a donation that potentially isn’t made until the taxpayer dies. Additionally, these trusts can be structured so that the asset continues to generate income for the taxpayer or a beneficiary during their life, so there is a continued income stream.
The Tax Cuts and Jobs Act has fundamentally changed how tax planning occurs. As you look to close-out 2019, it may make sense to put charitable gifting back into your 2019 year-end planning. The tax professionals at Schneider Downs are well versed in the previously mentioned strategies, as well as other year-ending tax planning ideas. If you would like to discuss these items further or have any questions, please do not hesitate to contact us.
