Maximize Your Tax Benefits While Supporting Students
Updated December 2019
By Matt Konrad
As 2019 wraps up, we take a look at ways to boost your tax benefits while making a year-end gift to support students. To explore ways to support Scholarship America, visit our giving guide!
A Quick Look Back
2017’s sweeping tax law changes impacted deductions, exemptions and tax brackets, making plenty of taxpayers modify their charitable giving plans.
The biggest impact that the new tax law had on charitable giving was the increase in the standard tax deduction, which all individuals and couples can claim. For individual filers, that amount increased from $6,350 to $12,000; for married couples filing jointly, it went from $12,700 to $24,000. That change meant that, for the last two tax years, millions more taxpayers found it unnecessary to itemize deductions (including those for donations to nonprofits).
Many observers predicted a steep dropoff in charitable giving, and the first tax year under the new law bore out this prediction to an extent: just 12 million taxpayers claimed charitable deductions on their 2018 taxes, as opposed to more than 33 million in 2017. This led to a significant decrease in the charitable dollars itemized — though Giving USA reported a decline of only 1.7% in total giving.
The impact of the tax law seems to be this: Americans are still donating to charity, though many fewer people are claiming charitable deductions or tax benefits. Fortunately, the fact is there are still plenty of options for reducing your tax burden by supporting nonprofits. What’s more, your support of higher education nonprofits means more students earning degrees, moving on to higher-paying jobs and boosting the entire economy.
Five Tax-Friendly Ways to Support Higher Education
Change Your Gift Size or Timing
Some donors, especially those who live in high-tax states, may find themselves coming close to the standard-deduction limit. If your itemized deductions end up approaching the $12,000 threshold, you can benefit by making a slightly larger gift—or by strategically spacing out your “annual giving” on a multiple-year plan. For example, instead of a $5,000 gift every year, make a $10,000 gift every other year. Itemize the years you make a gift, take the standard deduction when you don’t. Here’s a chart from the Community Foundation of Greater Atlanta showing how smart planning can boost your benefits.
Use Donor-Advised Funds to Tailor Your Giving
Donor-Advised Funds (DAF) are an attractive option for philanthropists who would like the immediate tax benefit of a large gift, but prefer to maintain gift disbursement at a proportionally lower level over an extended period of time (typically years). As an added bonus, Donor-Advised Funds have simpler criteria for creation and execution than the establishment of a private foundation, coupled with comparatively low overhead or management costs.
An initial irrevocable contribution of personal assets (cash, stocks, or other) to establish the DAF will receive the appropriate maximum tax benefit of a one-time gift in that same amount at the time of creation (which can be bolstered with additional subsequent gifts). The donor may then name the account, its advisors, successors and charitable beneficiaries. Depending on the nature of the provider of the Donor-Advised Fund gift vehicle, this donation may then be invested and grow tax-free, but the DAF may choose to disburse from this initial amount in the form of grants over time to one or more charitable causes.
Set Up Your Planned Gifts Now
If you are subject to the estate tax, charitable gifts reduce estate taxes $0.40 for every $1 given. If not, your heirs can receive tax benefits as long as you bequeath assets in qualified retirement plans, such as IRAs, 401(k)s, and 403(b)s. When these plan assets are distributed to you or your heirs, they are taxed as ordinary income—but if a charity is designated as beneficiary of a portion or all of a qualified retirement plan, you avoid the income tax that might otherwise be due on these assets.
Take Advantage of the Charitable Roll-Over
One major charitable deduction is still in place: taxpayers over 70-½, who are required to take taxable minimum IRA distributions can still use the “charitable roll-over” to give up to $100,000 of those distributions to charity each year, tax-free, without itemizing.
Support Your Employees, Your Family and Your Community
After tax reform, the law maintains the $5,250 tax deduction for employers who provide tuition assistance to employees. It also means that 529 plans, also known as college savings or qualified tuition plans, may now be used for qualified K-12 tuition expenses. (Previously they were only to be used for college costs.) The first $10,000 of such spending each year is tax-free on the federal level, though state-level 529 rules differ widely and may still levy taxes on these withdrawals. If your family is invested in a 529 plan, make sure you review your state’s laws before taking any distributions.
As you consider your charitable giving for next year, we encourage you to support scholarships, whether for your employees or your community. Private scholarships remain a vital source of aid—especially with a climate of uncertainty surrounding education funding. Scholarships, fellowships and grants remain non-taxable as long as they’re used for tuition, fees or eligible expenses.
At Scholarship America, we will continue to work with our partners in both the private and public sectors to ensure our donors are getting the biggest possible tax benefit, our scholarships make the biggest possible impact, and our students continue to have the highest possible level of support.