Giving should not be taxing!

July 23, 2019

For seven years, I ran a small, faith-based social-service agency in the near-west suburbs of Chicago.  It is first and foremost a community, where people with and without intellectual and developmental disabilities share life together.  The community is called L’Arche-Chicago and it is part of a larger, international L’Arche network of such communities.  If you are interested in learning more, you can go herehere and here.  The organization’s homes are licensed as Community Integrated Living Arrangements (CILA, aka “group homes”) in Illinois.  Their model of providing support is both unique and the best I’ve encountered.  Yes, I am a bit biased, but check it out for yourself.  Unfortunately, when the community was founded in 2000, this particular model was so unique that the Department of Human Services did not authorize the organization to bill Medicaid for CILA Waiver funding, despite the licensure.  As a result, the organization was fundraising the entire annual budget of about $250,000. 

 

The fundraising was unsustainable at that level, which is how I ended up in the Executive Director’s chair.  I had a background in finance, and I was tasked with getting the organization out of the red.  With a lot of guidance, training and just plain advocacy from another organization and its executive director, I persuaded the DHS to fund the people with disabilities who lived at L’Arche just as they would have funded them if they had chosen any other CILA provider.  That was a huge financial relief.  But we still had to raise about 20% of the budget ourselves because, as I have said repeatedly in these blogs, Medicaid Wavier funding does not cover everything.  And mostly what it did not cover were exactly those things that make L'Arche such a great place such as vacations, celebrations, retreats and participation in the organization's regional, national and international leadership, as well as attendance at advocacy conferences.

 

If your family member with a disability is already receiving services from an agency, especially assisted-living services, you have probably been tapped for donations.  I am unaware of any agency that is NOT a state-operated, large, congregate “developmental center” aka “institution” that is able to make ends meet on government funding.  (The inequity between state ops and Home-and-Community-Based-Waiver-funded set-ups is a whole other topic.)  And if your agency is good, and your family member is getting appropriate and helpful support, you are probably very willing to make donations, particularly if you are aware that 80% or so of most agencies’ budgets represent the cost of staff.  Adequate compensation is the minimum requirement to keep good staff, and good staff are essential to your family member’s wellbeing.  At the same time, you may feel a bit frustrated because the Tax Cuts and Jobs Act (TCJA) of 2017, which actually took practice effect in 2018, has made it less beneficial to give to charity.  In the past, a sizable charitable contribution would get you a sizable itemized deduction.  Now, you get a large standard deduction already and, unless you really give a lot, your charitable deduction will not provide any additional benefit.  But there are still ways to enhance the tax benefits of your contribution. 

 

As has been discussed many times in many forums, you can bunch your donations.  Instead of giving smaller amounts every year, you can give larger donations one year and then skip a year or two or three.  This way, your aggregate donation in the gifting year will be large enough that your itemized deductions will exceed your standard deduction, and you will reap some benefits.  A regrettable side effect is that the incentive for donors to bunch donations in this way will create additional work for the receiving charity.  Donors will be less inclined to use the autopay/ subscription method to make their gifts, and the charity will have a much less predictable income stream from donations.  Another way to leverage tax rules to your advantage and the charity’s is to donate appreciated assets, such as stocks, rather than cash.  Rather than you selling the stock and paying the capital gains tax, and then giving the after-tax proceeds to the charity instead give the stock directly to the charity.  When the charity sells the stock, no tax is owed, and the charity can use all the cash.

 

One way for donors to bunch donations from their tax perspective, but smooth out contributions from the charity’s perspective, is to create a “donor-advised fund”.  Community organizations like the Chicago Community Trust or Greater Horizons or the charitable arms of broker-dealers such as Fidelity, Schwab  or Vanguard all host donor-advised funds.  With a donor-advised fund, you as the donor can contribute a large amount to the fund at one time and take the full charitable deduction in the year you contribute.  At that point, the funds technically become the property of the charitable  organization that holds the account.  However, you as the donor still continue to decide to whom and when to make subsequent distributions from the account.  So, you can donate $40,000 to your donor-advised fund in one year, itemize your deductions in that year, and then dole the money out to one or more charities over the next 5 years.  You also decide if and how the fund is invested so that un-distributed money has a chance to grow.  Donor-advised funds can also facilitate the donation of appreciated assets, particularly ones that are hard to value or sell.  The organization holding the account takes care of these steps so that the charity does not have to.

 

If you are over 70 and ½, another way to regain some of the tax benefits of charitable giving that decreased under the TCJA, is to make use of Qualified Charitable Distributions (QCD).  With a QCD, the trustee of your IRA (SEP or SIMPLE do not permit this) makes a distribution directly from the account to a recognized 501(c)3 charity of your choice.  This distribution will satisfy at least part of your required minimum distribution.  If it is large enough, it will satisfy all of the RMD.  Using a QCD provides a type of “above the line” income tax deduction.  You enter the distribution as you would any other on line 4a of your Federal 1040.  But the amount that went directly to one or more charities is omitted from line 4b, which is the taxable amount that contributes to your total Adjusted Gross Income (AGI).  Because neither you nor the charity has to pay the IRS, the full amount of your distribution reaches the charity.  Had you withdrawn the distribution yourself, whether you used it for other living expenses or for charitable giving, the income tax on the distribution would have reduced your overall income for the year and undoubtedly reduced the amount available for giving.  I will point out here that since you have already taken the tax benefit on line 4b, your donation does not also count as an itemized deduction.  That would be double-dipping and as with chips and vegetables, double dipping is a definite no-go.

 

Tax deductions are not the only reason to give to charity.  You do it because you admire the work the charity is doing and you want to be a part of that work.  That is how I feel with charitable donations going to L’Arche-Chicago.  If the charity is one that supports people with disabilities and you have a family member with a disability or are yourself a person with a disability, you or your family member may even benefit directly from the work of that charity.  Still, leaving the IRS out of the equation does make giving more affordable.  And, while we know that the government is very good at spending our money, how many of us would argue that our favorite charity does a more efficient and effective job of using funds to target the cause of their mission?  Use these strategies to make giving less taxing.

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