Boulder County is blessed with many local charities that do wonders to support those in need. Our motivation to support them must of course first come from our hearts. While giving is primarily inspired by our desire to help others, getting a tax break in April is frosting on the cake. Middle to upper income taxpayers in most cases were able to deduct the cost of supporting qualified charities.
With the passage of the Tax Cuts and Job Act last December, personal tax returns have changed for most of us. Most of you will not be itemizing your taxes due to the standard deduction increasing to $24,000 for married people and the $10,000 limit on deducting property and state income taxes. If you don’t itemize your tax return, you will not get a federal tax break unless you take specific steps. Consider these options to protect the tax benefits of your generosity.
Donor Advised Funds. We absolutely love these accounts for our clients, as they are one of the rare financial tools that has a triple tax advantage. The first step is setting up a personal charitable fund of at least $5,000 at low cost providers Charles Schwab or Fidelity. Our local community foundations also offer these accounts with slightly higher costs, but the fees go to a good cause. Once the account is established, you fund it with cash or even better with investments that have appreciated in value.
The first tax advantage is the upfront charitable deduction in the year you fund your account. Let’s say your giving averages $5,000 a year to several charities, which may not be enough to qualify for itemized deductions. If you instead transfer $20,000 of investments or cash into a charitable fund, you could take the $20,000 charitable deduction in that year. Once you have funded your charitable account, you can decide on your own schedule when you want to distribute the funds to your favorite charities. With that $20,000 charitable fund, you can continue your planned giving of $5,000 a year.
The second tax advantage is that you do not pay capital gains on investments you contribute. Let’s say you hold an investment that’s doubled in value. Continuing the $20,000 example, if you transfer an investment to your charitable fund this means you’re avoiding thousands in capital gains tax on that appreciation. While you can give investments directly to charity, using a donor advised fund is a much cleaner and simpler process. The final tax advantage is that once you’ve transferred investments to a charitable fund, those assets can continue to grow and will never be taxed although all proceeds must be used for charity.
Qualified Charitable Distributions. If you have a traditional or inherited IRA, and are at least 70 ½ years old, then you can authorize an IRA distribution directly to a charity. Not only will this distribution be excluded from your taxable income, but it can be used to satisfy your required minimum distribution (RMD) that the IRS forces you to take every year. While there is no charitable deduction with this tax move, you are taking an IRA distribution that would be taxable as ordinary income and making it tax-free by directing it to a qualified charity.
State Income Tax Benefits. Colorado has generous state income tax benefits that could save you money even if you don’t itemize your taxes for 2018. The child care contribution credit allows those who make cash donations to charities to support licensed child care to receive 50 percent of their donation back as a credit to reduce Colorado income tax. You can double dip this credit to a certain extent in that your qualifying donation may count as an itemized federal deduction or a qualified IRA charitable distribution, although proposed changes in federal law would affect this tactic. When you start wading into these tax waters, consulting a professional is wise.
Colorado also offers an enterprise zone tax credit of 25 percent to support non-profits located in economically distressed areas in Colorado. Search for EZ Contributions on the Colorado income tax web site for qualifying projects, including some in Boulder County.
Finally, if you don’t itemize your federal taxes, Colorado has a charitable contribution subtraction that permits deducting the value above $500 of cash and property donations to qualified charities from your state taxable income. While you’ll just save about 5 percent of your donations in tax, it may be worthwhile if you already have good records of your giving.