5 Ways to Help Your Donors Stay above the Higher Standard Deduction in Trump’s Tax Bill

Share These Charitable Tax Deduction Strategies with Mid-Level & Major Donors and Recurring Givers (Includes Zombie Donor Plan!)

Is your U.S. nonprofit nervous about losing donations because of Trump’s Tax Cuts and Jobs Act?

Don’t panic. But don’t just sit around and assume nothing will change either. This is an opportunity to help your recurring, mid-level, and major donors expand their methods of giving while preserving their tax benefits.

This article is a tad more dense than a typical one from ProActive Content, so as they say in school, put on your thinking caps. And consider bringing along a sidekick accountant to do the grimy parts of your heroic work. Let’s start with what happened.

What Did Trump’s Tax Bill Do to Charity?

The issue relates to the standard deduction. He basically doubled it. It’s now $12,000 for singles and $24,000 for joint filers. The reasoning behind this was to simplify the tax code, which it does. According to an article in the April 2018 issue of Kiplinger’s, the number of households who will itemize their deductions will drop from 37 million to around 16 million – a 56% decline. That’s less work for the IRS.

It’s also a lot of people who now seem to have no tax incentive to give to charity, because the amounts they give will be less than the standard deduction.

And since tax incentives are one reason people tend to give at the end of the year – the highest season of giving for nonprofits – this should at least concern you. But again, don’t panic. Help is coming.

The other reason not to panic is because tax credits are not the main reason most people donate. It’s maybe in the top five, but hardly ever number one. So most people will still give happily. See more reasons why people give.

Nevertheless, it will be on people’s minds, and might surprise and upset some donors come tax day.

And that’s where you need to help them. This is your opportunity to get out in front by offering your recurring, mid-level, and major donors other ways to give and still allowing them to itemize their deductions and thus save some tax money.

Based in part on the same article in Kiplinger’s, here are five ways your U.S. donors can give to charity while continuing to win tax benefits.

5 Charitable Tax Secrets You Can Whisper to Your Donors

1) Name Your Charity as the Beneficiary of Their IRA

Traditional IRAs get taxed when you withdraw money. And when you reach a certain age (70.5 years old), the government forces you to withdraw money from your IRA, which means you are forced to pay taxes on it. These are called “required minimum distributions.”

And if your distributions are high enough, they can bump you up to a higher tax bracket.

For retired donors (which many of your biggest and most loyal donors are), this is a concern they think about a lot. Getting bumped to a higher tax bracket means they would owe more, and if they’re on a fixed income, that can be a problem. It also might mean they have to pay higher Medicare surcharges.

But, if a donor names your charity as the beneficiary of their traditional IRA, they avoid all these taxes and the risks associated with them.

Your charity gets the full value of the IRA. And the donor can count it as a charitable donation for that year and get the tax deduction that comes with it, which will likely be higher than the new standard deductions in Trump’s tax bill.

Why would a donor just give away their entire IRA? Well, lots of people have more than one retirement account. So their traditional IRA might be just one of many accounts, but it’s the one they’re most worried about because of the tax burden it represents.

Maybe it’s got $20k in it. Maybe $40k. Maybe more. But their other accounts are more than enough to cover their living needs. And more importantly – they want to keep giving to charity.

Making a charity the beneficiary of their IRA gives donors a way to make a lasting impact, escape the worries of the related tax burden, and claim a big tax deduction for the year they donate it. For mid-level and major donors, this is a superb idea.

2) Transfer Money Directly from IRA to Charity (For Donors Over 70.5 Years Old)

Rather than make the charity the beneficiary, which means the donor gives up their entire IRA, this approach allows them most of the same tax benefits while retaining control of the IRA account.

If a donor is over 70.5 years old, the feds allow them to transfer up to $100,000 from their traditional IRA to any charity – per year – and pay no taxes. It doesn’t count as income, but it does count as a required minimum distribution.

For wealthier donors who really want to avoid taxes on their traditional IRA and who want to give each year, this allows them to easily eclipse the higher standard deduction of Trump’s tax bill year after year.

Suppose a donor has $2 million saved across all their accounts, but $400,000 of it sits in a traditional IRA. That donor could choose to give $20,000 per year from the IRA straight to your charity. Even earning no interest, they could do this for 20 years out of that IRA, and use their other accounts to live their life.

Avoid IRA taxes, keep reported income much lower, and keep giving. It’s a win-win-win for them, and a win for you.

3) Donate Shares of Stock or Mutual Funds

This strategy gives the charity the value of the stocks, while helping the donor avoid paying capital gains tax on the earnings.

Like the previous strategy – if the tax burden from a donor’s stock earnings is a concern to them, this is a way to get around that while continuing to give to the charities they want to support.

A donor thinks in terms of how much of their income or their assets they want to give. They don’t care where it comes from. If they’re used to giving from a checking or savings account, these strategies simply shift the source of the donation. Make sense?

To a donor, giving $10,000 from a savings account is the same as giving $10,000 in stocks and mutual funds. So if they can give stock to charity – which meets their goal to make a difference in the world – and also avoid capital gains taxes, why wouldn’t they?

And if they give enough stock, they can also surpass the new standard deduction in Trump’s tax bill and get some money back on their taxes.

4) Make Two Years of Donations in One Year

This one might be a little less thrilling for your nonprofit, because it means you get a big amount one year but then nothing the next year.

However, if you have big projects or initiatives you’re trying to fund, you can work with donors who want to do it this way so everyone still gets what they want.

If a donor normally gives $10,000 a year and files jointly, that’s far below the $24,000 standard deduction. But if they give $20,000 every two years, then every two years they get a big tax benefit from their giving.

5) Set up a Donor Advised Fund So Even Zombies Can Donate

This is complex, but we’ve saved this for last since it’s probably the most popular option with donors. If your nonprofit still hasn’t hopped on the DAF bandwagon, you are missing out on major gifts and donations.

What makes a donor advised fund so great is the tax benefits combined with the flexibility and control retained by the donor – and their posterity.

That’s a big point in favor. With a donor advised fund, a donor can designate their heirs to be the adviser of the fund, so they can carry on the legacy of giving after the original donor dies. For your nonprofit, that means continued donations even after death.

In other words, DAFs make it possible for zombies to donate to charity!

(We need some humor here with all this tax silliness, right?

So what is a donor-advised fund?

In a nutshell, it’s like a retirement account, but the money is set aside in advance solely for the purpose of giving to charities and nonprofits. So the money can still earn interest before it’s donated. This is why all the major investment firms like Fidelity, Schwab, Vanguard, and T. Rowe Price offer donor advised funds in their services.

How does a donor advised fund gain tax advantages for donors?

Because you give can give all the money into the fund as a lump sum. And the year you give it, you claim it all as a donation for that year’s taxes. Get it?

If I give $50,000 to a donor advised fund in one year, I get to claim that entire amount on my taxes that year. This is way beyond the standard deduction, so I’ll get a huge tax deduction that year.

But, I don’t have to give all the money to charity that year. I can give it out over decades, potentially, including passing it on to my heirs to keep giving. In other words, once the money is in the DAF, a donor can then give it to charities at their discretion. Now, there are a lot of rules about that, which we’re not going to get into. This is the general principle.

With a donor advised fund in place, this allows a donor to do all sorts of things that are helpful to your nonprofit:

• Give recurring gifts for years
• Give major gifts to causes and charities that mean a lot to them
• Donate bigger amounts to your charity in your slower months, like January
• Support disaster relief with ongoing gifts, not one-time donations that pile up quickly but then run out before the relief work is completed
• Give matching funds to motivate other donors to give

Tell Your Donors How to Retain Tax Benefits In Spite of Higher Standard Deductions

Especially for your mid-level, major, and recurring donors, they need to be told about these five giving strategies.

It helps them, and it helps you. But they’re busy, so many of them probably don’t know about most of these ways to stay above the higher standard tax deduction.

ProActive Content recommends that you communicate to these specific donors about this through as many forms of communication as you can – email, direct mail, phone, and in person.

And do it before tax season hits next year, so they don’t get surprised when none of their donations can be deducted, and you’ll become the hero who saved them from trouble and gave them these money saving advantages.

Want more content? Get weekly nonprofit fundraising and copywriting tips, strategies, and motivations in the ProActive Insights newsletter.