Best practices for filing clients' taxes have changed as a result of the Tax Cuts and Jobs Act, and experts say advisors must re-examine charitable strategies ahead of this year’s April 15 deadline.
“We do 900 or so individual tax returns for our clients and are intimately involved in compliance and planning,” Kevin Koski, principal tax advisor at $2.2 billion AUA Carlson Capital Management, says. “The biggest area we have been working on [tax strategy-wise] is on the charitable deductions side,” he says.
The area is also a concern to other FAs.
“The Tax Cuts and Jobs Act did not restrict the rules for charitable contribution deductions,” reads a briefing from Andrew Friedman, principal of The Washington Update, a consulting firm that speaks about what changes in Washington mean to advisors. The act did, however, “provide investors with both opportunities and pitfalls when making charitable contributions,” according to Friedman.
Now, “if a client is making charitable gifts of a few thousand dollars a year and they continue that pattern, they may not get any tax deductions,” Koski says. But using a new strategy, Carlson prevents these tax losses, he claims. Clients are advised to “stack multiple years of giving” into one donation instead of spreading charitable giving over time, Koski says, adding that he uses donor-advised funds to minimize tax losses.
Donor advised funds are private funds that allow investors to issue grants to charities from fund holdings and are administered by a third party.
“With donor advised funds, which qualify as charitable organizations, clients put their money in the fund up-front and get a deduction that year. From that fund they then make grants out over the next few years,” effectively keeping annual charitable donations, Koski says. The strategy is meant to counteract the collision between charitable giving and the standard deduction produced by the passage of the Tax Cuts and Jobs Act, he says.
Bill Sweet, chief financial officer of $900 million AUA Ritholtz Wealth Management, says they have been using a similar strategy. But Sweet qualifies that the strategy represents a tactical change as opposed to changing how the firm approaches client tax planning.
“For a client that can get a higher standard deduction, rather than making smaller gifts, we lump it together to accelerate the tax benefit,” he says.
The IRA space has also seen spillover from changing charitable giving strategies, mostly because of the impact of required minimum distributions.
RMDs are the amount IRA plan participants must continually withdraw starting the year they turn 70.5 years old, according to Jeffrey Levine, director of financial planning for BluePrint Wealth Alliance. Clients 70.5 and older now have “unique ways of making charitable gifts through a qualified distribution from their IRA,” Koski says. And that’s because “the distribution to the charity counts toward satisfying the individual’s RMD obligation,” The Washington Update brief reads.
Instead of having IRA distributions added to client income and taxed “when the money comes out of an IRA, it is used in a qualified charitable distribution and excluded from client income under the new tax law,” he says. Justin Stets, president of Carlson Capital Management, says FAs can “reduce the income clients are reporting” by directing RMDs directly to charity. That lets them pay less in taxes, he adds.