Making Charitable Contributions Count (Part I)
It’s a New Year and a new opportunity to start out right with tax planning for 2024. Last month during producer projections the topic of charitable contributions came up frequently. Some producers just don’t want to donate grain and prefer cash…and sometimes so do their favorite charities. A new client who is looking to retire in the next twelve months was appalled to learn that his monthly church contributions were meaningless from a tax perspective. What was worse was that it was the first time he’d been made aware of it. All itemized deductions are tricky to take advantage of, but the contribution deduction is one that can be made viable if planned appropriately.
After TJCA was enacted in 2018 and limited the state and local tax deduction, the ability to itemize changed greatly. Under current law, a married taxpayer under the age of 65 can take either the greater of the standard deduction of $29,200 or their total itemized deduction, with itemized deductions being made up of medical expenses, state and local taxes, residential mortgage interest and charitable contributions. The state and local tax deduction is limited to $10,000 for a married couple, medical thresholds are almost impossible to hit unless there is something catastrophic or an individual enters a nursing home and most farmers do not have a mortgage on their personal residence. That said, to get over that $29,200 threshold and make the contributions viable tax deductions you have to donate $19,200 before the next dollar starts to make a difference.
But there are ways to plan around this. The first strategy and the one implemented with my retiring farmer is the use of a donor advised fund. Brokerage houses (Schwab, Fidelity, etc) have set-up charitable trust funds for which they serve as custodian. Farmer would write a check and contribute to somewhat of a “sub-fund” that would hold the money they would like to donate to a charity. For instance, if I set-up an account at Schwab, it could be named the Hardy Family Charitable Trust Fund. The day money is transferred to the fund it becomes deductible, as I have irrevocably transferred it to the charitable fund. The beauty is that the money does not have to be transferred to the end charity immediately. In fact, it could take the rest of your life to get it all used. In the client’s situation we covered about eight years of monthly contributions to church, that will be doled out via auto pay until the fund is depleted. Besides doing something good from a charitable perspective there were several overall benefits of this plan:
* Client actually gets to use his charitable deduction this year
*Client has a large deferred grain carryover, putting him in the 37% tax bracket. Instead of buying a tractor that he does not need to buy to reduce the tax burden, we spent money he was going to spend over time anyway and got a value of $.37 back for every dollar
*We reduced his taxable estate in a big chunk instead of by smaller gifts
*If the charitable fund is not depleted prior to the death of farmer and his spouse, his children will take over distribution of the funds
*Client can contribute again to the same fund next year when he finishes out selling his last crop with no expenses. The fund does not designate a specific charity for donations. For instance, if the donor decides in year two that he wants to give $10,000 to his local Farm Bureau Foundation, that is fine. In year three he can withdraw funds for the local church, local homeless shelter and the heart association if he would like. Donations to the end charities are very flexible.
*The checks to the charities all come from the Charitable Fund, thus less work on the donor’s part and donations can be made anonymously if desired.
*Because the fund is part of a larger fund at an investment house there are no separate tax filings required as there would be with a private foundation
If charity is something that is important to you, a donor advised fund is a good way to get some bang for your buck with a big deduction in one or for multiple years (given multiple contributions). If this is something that interests you, make sure to start off 2024 right…set-up the fund and make all charitable contributions from it to maximize your tax benefit.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.
Excellent summary of the Donor Advised Fund opportunity.