Charitable Clumping and Other 2019 Strategies

Pancakes are Saturday morning favorites in many households. Whether you top them with “SEER-up” or “SIR-up”, pile on the blueberries, or even the chocolate chips, every good flapjack maker knows—you want to leave a few clumps in the batter. (The science of cooking tells us to avoid creating a rubbery texture from over-mixed gluten molecules!)

“Clumping” can also be good when it comes to your charitable giving: a truly innovative way that you can bless the charities you cherish, while also improving your own tax situation. Thanks to the new higher standard tax deduction in place, Charitable Clumping allows you to still itemize in certain years and maximize your overall deductions. Charitable Clumping is a fairly simple exercise: First, you contribute cash, investments or appreciated property that would normally represent several years’ worth of giving into a specialized giving account, known as a Donor Advised Fund (DAF).  Once the assets are contributed, you get the full deduction in the year of contribution, which should allow you to itemize your deductions in the first year.  The Clumping effect then allows you to slowly distribute the contributed money to the charitable organizations you want to bless.  These distributions can flow out to the charities of your choosing over the next several years.  In those following years, you simply elect the standard deduction.  The compounding effect of itemizing in Year One and electing the standard deduction in the follow years gives you the potential to greatly save over time.  While you wait, the funds grow tax free in the DAF.  For example, a husband and wife could donate $45,000 of appreciated stock to the DAF in year one, avoiding the capital gains tax on the appreciation that would normally occur if they sold the stock for any reason. The couple would then qualify for an itemized charitable deduction, lowering their taxes in year one further than the standard deduction. The donor could distribute $15,000 each year to their favorite charities from the DAF.  In years two and three, the couple simply elects the standard deduction and does all their donating from the funds in the DAF.

In addition to clumping your tax benefits, don’t forget about the Qualified Charitable Distribution (QCD) provision for those who are subject to Required Minimum Distributions (RMDs) on their IRAs.  The power of doing your giving directly from your IRA is that it never shows up on your tax return.  Having less income on the first page of your tax return means that you have an increased potential to reduce or eliminate taxation on your Social Security benefits.  Normally, all RMDs are recorded as income, which raises your Adjusted Gross Income (AGI).  It doesn’t matter if you then give all of the RMD away to your favorite charities, thereafter; once it touches your bank account, it raises your AGI, which can cause your Social Security to become taxed even more than it may already be.

Get these strategies going as soon as you can (or as soon as you get the breakfast dishes done), if you want to help ensure you maximize your benefits for the 2019 tax year.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.