Tax experts advocate that money managers gear up for “more tax planning than usual” this season, as advisors and clients familiarize themselves with new rules, according to Schwab Charitable.
Advisors should start with the following savvy charitable giving-based tax maneuvers:
Make sure to record charitable giving. Many clients are leaving tax benefits on the table when they fail to record charitable contributions, Schwab Charitable said.
“It’s especially easy to lose track of donations made at events or with cash, check or credit cards,” Schwab said. “A simple reminder to review checkbooks, credit card statements and email can jog a client’s memory.”
Organize your paperwork. It won’t be easy for clients to find the motivation to track and record all their charitable deductions.
“Encourage them to think of this paperwork as a giving report for the next family meeting, which can help pass on values and involve the next generation in giving,” Schwab Charitable said.
Explain the basics. Some clients may not fully understand that the new tax legislation does not affect their 2017 taxes.
“This presents an opportunity to open a dialogue with clients about tax planning in 2018, and charitable planning can help make the discussion more personal and rewarding,” Schwab Charitable said.
Eighty-five percent of financial advisors in a Charles Schwab 2017 RIA Benchmarking Study said they currently offer charitable services or plan to in the near future.
“This is a great year to start the conversation with clients,” Schwab concluded.
Lumping contributions. Tax-saving charitable giving strategies are changing, too.
“We envision more people who in the past have made charitable contributions in order to itemize, may be deterred to do so due to the increase in the standard deduction,” said Levi Sanchez, co-founder of Millennial Wealth in Seattle. “One strategy moving forward is to lump charitable contributions together every other year or every other three years, in order to get above the standard deduction and itemize.”
Here’s how such a strategy might work, according to Mark Durrenberger, a certified financial planner based in Evanston, Ill.:
A married couple gifts $15,000 to charity each year. Normally they would itemize to take that $15,000 deduction, but now they're better off using the new standard deduction of $24,000 per married couple.
“Instead of gifting $15,000 each year, they can gift $30,000 every other year,” Durrenberger said. “In that year, they would be able to take advantage of itemizing.”
Leverage a DAF. In the example above, if there's a specific reason for the gift being $15,000 each and every year, and a donor wants to gift $30,000 every other year, that donor can gift to a charitable donor advised fund.
“Schwab and other brokerage firms have these available,” Durrenberger said. “A donor advised fund lets you gift to charity, but still manage the investments and pay the money out to the charity as you like. You claim the full deduction in the year you make the gift, but can give the money to charity over time to even out your new lumped deductions.”
There is a caveat with a DAF approach.
“The nonprofit community may be somewhat slow to embrace this option and encourage its use owing to the almost instinctual resistance to DAFs on the part of many nonprofit organizations and leaders,” said Michael Montgomery, principal at Montgomery Consulting, a fundraising consultancy in Huntington Woods, Mich.
In a tax reform crossover year, it’s more important than ever to connect with clients’ tax and estate advisors to ensure their tax, estate, financial and charitable planning are maximizing value.
Not only is doing so good customer service, it’s also a proven method of generating referrals from other advisors.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]