With changes to the tax law coming in 2026, 2025 is turning out to be a strategic year for philanthropic planning. On this edition of AZPM's “Navigating Our Financial Times,” CPA Edward Zollars joins the conversation once again to discuss how those changes may reshape plans for charitable giving.
Full Transcript:
Nicole Cox: As we head toward the end of 2025, beginning of 2026, people planning philanthropic strategies are paying closer attention to the changes made to the tax law concerning charitable contributions. I'm Nicole Cox.
Linda O’Bryon: And I'm Linda O'Bryon. You're listening to Navigating Our Financial Times. Although several provisions are in effect for the 2025 tax year, there are also some that won't hit until 2026 that might make people rethink their plan for charitable giving.
NC: Here to discuss those changes is Edward Zollars, CPA with Thomas, Zollars & Lynch, Ltd. and lecturer and author for Kaplan Financial Education CPE Group. Thanks for joining us today.
Edward Zollars: Thanks for having me here.
LO: Hi, Ed. Well, with the One Big Beautiful Bill's changes to tax laws in 2026, this year 2025 is turning out to be a strategic year for planning charitable giving. Let's start with three big changes and then discuss how those changes may reshape what tax filers do for the rest of this year.
First, for tax year 2026, Congress reinstated a limited charitable deduction option for taxpayers who take the standard deduction. What is that amount? And what are the restrictions?
EZ: Basically, it's going to be a charitable contribution up to $1,000 and except married filing joint, which is going to be $2,000, that you can take if you make a charitable contribution, but you don't itemize deductions. So you're not going to be able to claim them otherwise. So it's limited. It's bigger than it was before.
Previously, it was down at $300 and $600 the last time we had it, which was back in 2022, I believe was our last time we actually had this thing it ran for a short period of time following the CARES Act COVID situation. We had that for a while.
So it's useful for non-itemizers. It gives them a little bit of ability to claim this deduction that otherwise kind of of goes wasted because they don't have enough in terms of other deductions, especially with the larger standard deduction that we have now. It just gets tougher for them to get any benefit out of charitable contributions.
NC: Second, there will be a cap for those who itemize their taxes. 35% for those in the top 37% marginal tax bracket.
While a 2% difference may seem minor, for a major gift, the impact is significant. Could this be a reason to look at your projected tax bracket for next year and either defer or accelerate income and expenses before the cap goes into effect?
EZ: You could very well look at, you know, itemized deductions are capped. The math is a little bit fun, but effectively capped at 35% benefit. You don't get more than that benefit of reduction in tax, 35% of the contribution. That does take effect next year. It is a return, greatly modified, of something that was going to kind of come back called the Pease Limitation on Itemized Deductions that we used to have. But it's now directly done to the value of your itemized deductions, which includes charitable contributions, obviously, to no better than 35%.
So if you're a taxpayer, it's going to hit the top ordinary income bracket. It probably makes sense to consider that your charitable contribution will be more valuable in ‘25 than it likely will be in ‘26 when you may end up having, you know, all those contributions going down to a 35% value instead of 37%.
Again, how much is 2% of your contributions? And therefore, you know, how valuable is it to be able to get the extra 2%? So that could cause some acceleration into this year to save that part of the 2%.
LO: And then Ed, the third point is for those who itemize, there will be a 0.05% floor for charitable contributions. Only the portion that exceeds that half percent of your AGI, which is of course adjusted gross income, will be deductible. Corporations will also have a floor, but it is 1%.
Prior to 2026, they are fully deductible if you itemize. How important is that half-percent floor?
EZ: In one sense, it sounds really small. It sounds okay, half-percent. But depending on your AGI, it could be significant. Obviously, $100,000 AGI, that's like the first $500, you lose the benefit of that $500.
The number is odd, but I suspect this is sort of tax provision we sometimes see when they are aiming for a budget number specifically, and they just needed a little bit more revenue. This is a way to raise a little bit more revenue, same thing with the 1% for the corporations, 1% of taxable income for them, as opposed to gross income, which is the individuals that we look at. And, like I said, especially if you add the 2% on top, now we're looking at 2.5% of the deduction.
And 2.5%, you know, I'm here in Arizona, and that's actually the state income tax rate. So that's the equivalent of, you know, the entire tax you pay to Arizona on some sort of income. So it's like, it's not totally irrelevant. 2.5% is, potentially, given the size of your contribution if you're in the top bracket, could be a fairly significant number that you might want to try to get things into ‘25 to avoid those ’26 changes in the law that are going to cost you that 2.5%.
NC: Now since the standard deduction increased significantly during President Trump's first administration, only about 10% of households itemize. With this increase, what effect is it expected to have on charitable giving?
EZ: It's tough to know because it didn't seem like the one we saw last time had the massive effect that, you know, the charities worry about. I think sometimes because people don't really understand how this works. So they're not quite sure how to get their benefit. And if you're not sure how you get the benefit, then you do it because it's tax deductible, and definitely I've seen confusion from people who don't understand that if you're not itemizing, the fact is deductible if you itemize is kind of irrelevant for your purposes.
But obviously it's not a positive for a charity to see, you know, that in fact, you know, fewer and fewer are itemizing. That's why we probably are beginning to see non-itemizers’ charitable contributions return. We're seeing it in some states that are allowing it. The idea is, you know, that allowed people to get a benefit for charitable contributions, even though we're more and more going with a higher standard deduction to eliminate the need to do the full-blown itemized deductions for people to get their benefits.
So yeah, I mean, I'm sure charities will try to now move more and more into that non-itemizer category and allow the number to grow.
LO: Is there any plan for that deduction to increase over the coming years?
EZ: None in the law, obviously, nothing that's official. There's been speculation over the years that Congress might want to move to basically kind of gut down itemized deductions. They consider it to be a mess. Most taxpayers, even before this change, didn't itemize; you know, usually it was higher income that did. Pretty much to itemize, as a practical matter for most people, you need a home mortgage for real estate taxes, for the home mortgage interest. And then maybe charity goes there.
With the current numbers, it's even tougher to get there in that level. And the idea would be to—okay, charities are the ones people complain about, you know, because the charitable contributions that could negatively affect them. So there had been some theory that maybe Congress was using the non-itemizers for charitable contribution as a test case to start putting a bit more and more numbers in there, to say, “okay, charities, we're allowing this. These people are going to get their benefit. They don't need to itemize,” and to eliminate as much as possible the use of anything but the standard deduction for the vast majority of taxpayers. As we already mentioned, we're looking at 90% of taxpayers now don't itemize.
LO: Well, you know, the standard deduction has more than doubled since 2017. Can you talk about bunching charitable donations and when that might be considered, and how it would work under the new rules?
EZ: Okay, when you go with bunching, you got to be at least in the ballpark of itemizing because the point is to allow yourself to be pushed over the top that year. Now, there are various ways you can do it. If you don't want to do anything fancy, you just tell the charity, “I'm going to double up this year: Give twice what I'm going to give you. But realize next year I'm giving you nothing. So I'm going to come back, double up later.” The idea is every other year you bunch your charitable contributions. So you get a benefit from having put them all together without giving more necessarily. By being able to bunch them to push yourself over the standard deduction limit for that year, knowing that the following year you'll come back under it. We're still giving what we're used to giving.
A fancier way of doing it? Some people use donor-advised funds (DAF), which most of the large brokerages have. Those are a way to essentially give your contribution to what's kind of an intermediate charity, shall we say, which is the donor-advised funds run by the large brokerage firms and other organizations. And those are, as they say, donor-advised. Technically, that charity has a right to move that to whatever charities they want to move it to, whenever they want to move it. But generally, the concept is they do ask the original donor for advice. They're not mandated to follow that advice, but they generally follow the advice as long as it's legally valid. You know, they're actually asking it to go to a charity and they're not just having it all sit there forever. So they're making some movement so the charity would follow it. So the donor-advised funds allow you to therefore now make your double contribution this year, but the charity will still see an even cash flow. Right? Presumably, I'll ask it to please give half of that this year or give whatever this year to the charity and then next year give whatever.
Also could allow, if you're willing to do it, even to maybe spread it a bit further. So maybe we need more, maybe like triple make this work. So maybe do a triple contribution this year, get ourselves over the limitation, get a deduction, and then spread that out over that period from the donor-advised funds. But that is an option and obviously you have to work with one of the organizations that is that and then have them go ahead and help you handle the contribution, understanding that they are not obligated to give to what you say. But they generally will. The only reasons I've known them not to do it is because somebody was asking them to give it to something that simply isn't a qualified charity. And yeah, they can't do that, so then they got to give it to somebody else.
NC: I’m really glad you brought up donor-advised funds. We actually want to explore that a little bit further into the program, as well.
For 2025, the maximum credit donation for a public school is $400 for married filing joint. The maximum credit for a certified school tuition organization (CSTO) is $1535, married filing joint and that doesn’t include the plus-overflow credit, which is an additional $1527 for married filing joint in 2025. Can we go over some of the history there? Why is there such a difference between the maximum credit for public schools versus CSTOs?
EZ: Generally, it should just be in the history of the legislature, and how this whole thing developed. Initially, the initial credit, which now is when we don't call the switcher credit. When that one started out, it was more about double than the public school one. They had a public school one to go with it at about the same time. It has grown, has had more political support. So let's be honest, it's political support that has got it there. And so that's how we've gotten to the higher numbers.
Now, perversely though, Arizona's tax rate has dropped at the same time. And we've had some people wanting to use things like the pass-through entity taxes on their S corporations or partnerships. And that credit's actually more valuable because you get deducted to than the private school organizations. So I suspect part of it may have been those organizations just trying to claw back the funds they would lose because people started doing the math. They just didn't need to make that much to get rid of their Arizona tax. Or they were using the pass-through entity tax that we got a few years ago and they just didn't have room for it anymore. So I suspect part of it was trying to make up for the amount they're going to lose anyway because they were the biggest credit. They therefore had the biggest, the most to lose when rates came down and we had these other competing and one very competing, much more valuable credit for the pass-through entity tax.
LO: Ed, on the topic of education, changes under the One Big Beautiful Bill will mean higher tax rates on university endowments in 2026. There will be a new tiered endowment tax on university endowment investment earnings with rates ranging from 1.4% to 8%.
What does this change mean for some universities and donors?
EZ: Well, the idea being for the universities is it's going to essentially, it's meant to—to be blunt—to penalize large endowment funds because that's really where the rates start coming from. It will be when they're larger endowment funds. Conceptually, probably one of the ideas for various reasons, there are various reasons to do this, but at least on paper, the theory is to encourage them to actually spin down some of that money, to see other uses for it, and maybe for donors to encourage moving them to other universities, et cetera, to provide for those that don't have the endowment funds of the size of some of the large, long historic universities to move stuff there. So it will make some differences.
Donors who want to make sure that the universities get the real use out of it and can do something may start saying, "I really should probably move it to a smaller organization, one with a smaller fund to make that go." That's kind of the issue.
That said, I don't think I'm going to see Harvard turning down money just because it would raise their endowment fund. I think they'll still take it.
LO: It's interesting, though, the strategy that's being used here, and I should also add that private colleges with less than $3,000 tuition-paying students are exempt.
EZ: I mean, it was aimed at, to a large extent, the Ivy League, that type of caliber that all had pretty large endowments, especially the Ivy League schools that have a long history of building those endowments.
NC: Well, looking ahead, the nation's first federal school voucher style program will begin in 2027. It'll act as a tax credit program. Individuals can receive up to $1,700 in credits for donating to nonprofit scholarship granting organizations (SGO). Supporters say it will expand school choice. Critics are concerned it will divert funds from public schools. What are the implications of this change?
EZ: Basically, what we've got is a federal version of the Arizona credit. It's pretty much the same thing. 100% credit, $1,700 total. You cannot use that. If you give to that, let's say the Arizona or Arizona organization qualified for it, you can't get both credits. The feds say, if you're getting a state credit for this thing, you can't take the federal credit on the same dollars. You've got to switch your dollars around. So it's going to kind of in a state like in Arizona, it's going to make it kind of a three-tiered thing now instead of two tiers: the federal, and then the two state levels in place.
It's the same program and with the same pros and same cons as the Arizona program has. I mean, that doesn't really change much of anything. If you think they’re the greatest thing in the world, you'll think this is a great addition. If you think they are a major problem, they’re a risk to the public schools, public school funding, then you're not going to like them. I mean, it's just basically from a policy standpoint, they're the same thing. It's a repeat.
The states will have to though, at least some states will need to certify the organizations. The feds did not take on the certification part of this. Still to be clarified and we get more guidance, but it would appear that as long as a state certified the school, even if Arizona decides not to do it. And the reason why it's not till ‘27 is the states, a lot of them are going to need enabling legislation next year if they are going to certify these things. So it’ll have to have some time to get that in. In essence, if Arizona didn't do it, but let's say that, Wisconsin did, then in theory, an Arizona taxpayer could give Wisconsin school.
So I would expect there's going to be some pressure on the legislature to make sure we enact whatever might be necessary. In theory, there's some suggesting the governor could just do it by herself. My guess is she's going to want a legislative coordination. You know, in essence, look, we got three of these things. How exactly do we coordinate these things? And how do we set them up? And, you know, how does this work with all three of these in place? So I would think that we'll probably see it come up in this session for Arizona.
LO: Well, to look at this a little deeper, Arizona already has, as you mentioned, the open enrollment for public schools, meaning that Arizona students can apply to attend public schools outside of their district, if there's space available.
This also includes charter schools. But if Arizona does opt into the federal program, what sort of changes do you think we would see for the state's tax credits?
EZ: My guess is they're not cutting them. So we're probably going to see the Arizona credits stay around as is. And people are used to those. I'm sure the organizations would prefer you don't touch those. You know, you don't like to disrupt things, confuse people.
So it'll be another additional “on top of” number, that would be the $1,700. It would allow, you know, they would collect that. So changes-wise, it would put some more money into that system. It is not directly linked to public school funding because, you know, the feds aren't the primary source there, unlike what we see with Arizona, where it does kind of, you know, the legislature kind of figures based on that. So we'll just have to see, I think, as a standpoint for affecting the schools, it'll be probably similar to what the credit was when they first came in. Same basic kind of impact. It will expand some, the money that's available.
It will, you know, it'll have whatever impact that is. And for the schools, for the organizations in Arizona, probably the big advantage to them is they're no longer constrained by the Arizona income tax amounts, which have gone down. So while people may run out of Arizona tax to take credit against, they might still have $1,700 of federal tax to deal with. And so it could absorb that credit. So that's probably the practical side of that one for people in Arizona.
NC: I thought that was really interesting. Plus how you said that people in Arizona, especially if they divide their, let's say Arizona is their primary residence, right? And they file their taxes, and they divide their time. They could actually support a school in another state.
EZ: Right. If there's nothing in the federal law that seems to block that, we just need a state to recognize that school, the state the school’s in, to recognize that school as, you know, as having the program or, you know, the program or the organization having the program to accept the scholarship contributions.
NC: We often think about planning in one-tax-year increments, but with these changes, can you briefly review three or four key tax strategies individuals should be considering that might even include multi-year planning?
EZ: What you need to look at for multi-year are things that are limited by year or things that are changing in ‘26. And is that change positive for you? Is it negative for you?
And so therefore, do you want to accelerate income to ‘25? You want to accelerate deductions into ‘25 and conversely, do I want to accelerate, do I want to move deductions into ‘26 or do I want to move income into ‘26?
And it all depends upon the basic rules. Now we're not having what we thought, or what could have been the issue had we not seen an extension of the TCGA provisions (Tax Cuts and Jobs Act), there would have been a lot of multi-year planning going on because you would have had radically different rates next year. You would have had a number of provisions coming back, some disappearing, some doing other things. Some of the ones you have to watch for, though, that have limits are especially—there’s a lot of weird phase-outs in this law. Congress fell in love with them years ago. They keep doing them. When you are near a phase-out range, you get really wild tax rates because one dollar more of income can cause you to tax another $1.20. You know, one dollar more of income will put another $1.20 in taxable income because you're losing something that you're getting there. Some of the big losers that we have that are going to phase out, obviously every one of the new deductions. If we're going to talk about the tips, you know, talk about the overtime, you know, talk about the car interest deduction. If you bought a car in ‘25 and financed it and it's the right type, or you're talking about the over-65, all of those disappear as your income goes above a certain level.
That means you would probably prefer smooth income that maybe stays just below that level or, conversely, kind of like the discussion of bunching for purposes of your charitable contributions, maybe if you're going to go above the limit, maybe then you worry about, well, let's just get rid of it one year and get the full benefit another. If we're going to lose it, let's try to plan. Therefore, if we're not going to otherwise cause ourselves problems with bumping rates way up, maybe we just try to make sure we at least get our overtime or over-65 deduction, at least every other year. But then we're looking at cross year planning.
There's also big phase-out higher income when we look at the state and local tax $40,000 deduction versus the $10,000 that phases out as income goes above half a million dollars, much higher numbers, but the same basic problem because that's like 30%. So from $500,000 to $600,000, we get back down to 10 grand. That means that effectively that $100,000 from $500,000 to $600,000, if you have that income, you're going to trigger potentially $130,000 of more taxable income. We're paying tax on $30,000 just because you're losing $40,000 going back to $10,0000 during that time period.
There is a weird change in the phase out of very arcane, most people are going to be, you know, would be a little bit confused about how it works, but it does impact people. They just don't know it if it does. The phase out of the AMT exemption, again, married couple is over $1 million of AMTI (Alternative minimum taxable income). So again, bigger numbers, but it's going to phase out at a double accelerated rate beginning next year, which means for that narrow category, they're going to lose that benefit much faster than they had before. It's really weird because it only affects people like from a million dollars to a million, two or three, not a huge number of people. You know, if you're Warren Buffett, it's not your problem.
NC: And just clarifying, that AMT is that alternative minimum tax.
EZ: Yeah. Alternative minimum tax. If you're somebody with less than a million dollars of income, that doesn't affect you either. It's just that weird category. Another one that's lower in numbers, but does have an impact: Beginning next year, we are going to take longer to phase through, you know, there is a rule to qualify business income deduction at 20% that you get from your business, right? Your sole proprietorship, your partnership, your S corporation.
NC: The pass-through deduction?
EZ: Mhmm, yeah. For QBI. Qualified business income is the term Congress named it. That one, generally, if your income's high enough, if you're called a specified service trade or business, which is like most professionals are what's called SSTBs, you can't claim that. And if you can claim it, you're limited to an amount based on the wages you paid and or those wages and a portion of the investment in equipment and buildings and stuff you have.
Well, those don't apply below a certain income level, right? Which changes every year. But this year that phases out, once you put income level, you phase that out over $50,000 if you're single, you phase it out over $100,000 if you're married.
Next year, that'll go to an additional 50%. Again, a weird category, right? And that odd category that fits it. But if you're in that group, you're paying QBI, you want to go through and make sure you've run some numbers to see if you're in what's called the phase-out range, if it impacts you. And then you might want to consider trying to, modify as much you can, maybe get a little more of the income into next year when it phases out slower and try to keep yourself below the level this year. But again, you have to play both years at the same time, looking to see what's changing and what's not: what are you going to get, what you're not going to get and how it works.
So there's a lot of those things. And again, many of them are very weird. They're only over a certain range next year. But, they're all through phase-outs, cause all these problems. We don't have the massive things we would have had with TCGA going away. But we do have those kind of odd situations coming into play.
LO: A lot of homework it sounds like people need to do to make sure they're on track. Just ahead on Navigating Our Financial Times, we'll take a closer look at strategies to consider when making charitable contributions. That's coming up in just a few moments.
NC: You’re listening to Navigating Our Financial Times. We’re here with Ed Zollars, CPA, talking about the tax law changes and how that might impact charitable giving. I’m Nicole Cox.
LO: And I’m Linda O’Bryon. Another Big Beautiful Bill change is the federal estate tax exemption that has been increased to $15 million for the 2026 tax year. This means the majority of estates will not be subject to federal estate taxes. Ed, can you explain how these changes will work and what they mean for long-term planning considerations?
EZ: What we have now is, we have essentially made permanent what was adopted at the Tax Cuts and Jobs Act. That was the last big jump up. Scheduled to go back down. So, fine. But now we have a permanent, as permanent as Congress leaves permanent things, which is usually not permanent, but they'll be there for a while, that you could have up to, if you're a married couple, $30 million transferred to the ultimate heirs. Because when somebody dies and they're married and they just leave the assets to their spouse, that's not ever subject to estate tax. Been exempt for a while, but this allows them to accumulate $30 million because they can borrow the unused amount from the first spouse. If you file a portability election, it's called. And so $30 million. So that means, yeah, for most people, the estate tax has become the non-entity. It's not actually the “modern death tax.” The more interesting “modern death tax” is the actual capital gains tax.
If you still have things structured under the old structure where you're trying to avoid putting things in the second-to-die’s estate. Because remember, when somebody dies, we get a step up in bases, assuming that something's gone up in value. So the real estate, the stock, whatever. So that means that when the second-to-die dies, if everything's in his or her (most likely her estate--odds say 75% chance it's her) estate, we're going to see a massive step up in value that when the kids sell the property, which they often do pretty quickly, they're not going to pay any income tax. If you haven't changed your plan since the 2000s, because you hate talking about death, and there are people like that, and you have that old plan in place, then the kids are going to face potentially a significant capital gains tax, depending on how long the second one lives and how much value goes up in that trust that's established and sitting there for a while.
So it means that old style traditional estate planning that a lot of CPAs and attorneys were doing back in the 90s, has pretty much gone away except for those in the very high net worth areas. So if you're Elon Musk, you still have to worry about the estate tax; if you're those groups, you do. But if you're somebody that just has assets that previously seemed like, I heard one advisor once called these, you're now considered the “destitute wealthy,” only $29 million of assets, you're able to pass it through tax free. So the planning switched over a few years ago, and this will just continue that, of normally trying to get things into the second estate, to get that second step up, not trying to avoid the second estate, unless you believe you really have a chance of things going over $30 million. Because the federal estate tax is still significant, but only if you have over $30 million of assets, if you've done your planning at all right.
And even doing no planning, $15 million will cover the vast majority of not only individuals, but couples without doing anything, $15 million could cover. So we're not paying as much attention to the estate tax as we used to. And there are a few states that still have estate tax. So if mom and dad decide to move back to, you know, Washington, they may need to consider some estate planning like what we used to do, but for most people, most states do not have a state-level estate tax. So we're pretty much saying that's not our problem. But if you haven't revisited your estate plan in a long time, maybe you should, because you might find that you're setting the kids up to pay capital gains taxes that otherwise they wouldn’t owe.
LO: Good thinking. Well, with changes to the tax law, should people consider reviewing their RMDs (required minimum distributions) annually if they are 73 years old or older?
EZ: Right. Please remember in the midst of everything else that happened, we had these two bills called the Secure Act & Secure 2.0. They have pushed back RMD days. So if you're thinking about, you know, you require minimum distribution and you hadn't really read up on it recently, you think when you turn 70 and a half, you got to start taking them, that's not really how it works anymore. You want to go back, and the RMD tables were, interesting enough, were perfect timing. Just before COVID, we reset life expectancies in the tables, which actually helped because after COVID, life expectancies were a bit lower. The tables would have come down. So we got a reasonably long stretch. So you want to make sure using the current tables, you know, the most recent set they had done.
And then also make sure that you understand what your start date is. You know, those people born in 1960 or later are looking at 75 as their start date. So quite a bit later than they'd been thinking not that long ago, they would have to start drawing from their IRAs or potentially their employer plans on what's called the minimum distribution programs. So, you know, we have a lot longer time period to wait to take the funds out. Nothing stops you from taking them out. If you want to take them out beginning at 59-and-a-half and you look at your finances to make sure that makes sense—because it's not great to be destitute at 70 and discover that you just ran out of all your retirement funds. But if you're not doing that, then probably, you know, we take a look and we think about what we want to do and how we want to do it. And minimum distributions have become less of an issue.
Now, the other thing to do with RMDs, please remember if you are charitably inclined, because we've talked about the standard deduction and the problem is there, remember that once you turn 70-and-a-half, you can start taking money directly out of the IRA sent directly to the charity. It will not be included in your income. Now, you don't get a deduction directly, but think about this: You got the money out of the IRA. You got it to the charity. Before you turn 70-and-a-half, if you do that, you pay tax coming out of the IRA and you then put it on Schedule A and have to be able to itemize. It is a way of making charitable contributions, even though you can't itemize. So for those who have the ability to do it, and are charitably inclined, you want to look at once you turn 70-and-a-half, potentially using the IRA funds if they don't otherwise disrupt your financial plan to make charitable contributions.
LO: And Ed, can these contributions be in the form of stocks and bonds as well as cash?
EZ: From the IRA, it'll come out as cash, the most part. But if you have taxable accounts that have stocks and bonds, they make great donation gifts for a simple reason. If they're appreciated. So let's say you got Apple stock back in the 90s when it was about to go bankrupt and you're still holding it today: Way higher than what it was then.
LO: Yep.
EZ: What you can do now is you can take, let's say, $20,000 of the Apple stock that maybe you paid $1,000 for, and you could just—and probably you paid less than that, because they were really in bad shape. But what you paid it for, you can give that you will get a charitable contribution, assuming you can itemize, of 20-some-thousand dollars would be your deduction, subject to the percent of income limit, but let's assume we have that covered, without having to recognize that income.
So you've gotten rid of that whole appreciation out of your account and done it. You can do that with anything the charity will accept that’s appreciated. And usually stocks are best because they're easy to value. The charity knows how to liquidate them quickly.
It's not like something I know some people say, hey, Bitcoin, well, yeah, that kind of but no, not really. There's lots of issues there, including the charities got to move really fast to liquidate that because conceivably it could go up, I admit, but it could go way down to because it's volatile as it can be. So I don't think, that's maybe not the best choice. But you might be able to do it like with the stocks. Appreciated stocks are the perfect sort of thing to gift to the charity.
NC: Those are some good considerations. What are some of the other benefits you can mention about including charities in estate planning?
EZ: Including them in estate planning is not as beneficial as it used to be. Generally, income tax benefits are going to be better than estate tax benefits. But it's still possible. I mean, if you want to make a charitable contribution, let's be honest. All of this depends on you being a charitable inclined, because I usually find you're never going to make money making a charitable contribution. Just doesn't work that way, at least till we get over 100% tax rate.
But if you do have an estate tax, obviously, then making contributions directly out of the account’s fine. If you want to do something when you die, you want to hold on to it and keep it till you die, that may be a case where giving something like a chunk of the IRA account would be a good idea, because that gets out of the whole fact that your heirs will pay tax on that anyway. So rather than give the charity the taxable account, let's just go ahead and give them 25% of the IRA, or whatever of the IRA, some fixed number.
Some attorneys would strongly counsel that you always give fixed amounts if you're going to do it from the estate, because you do percentages, then the charity may have legal counsel that's going to want really detailed accounting if they get a percent. And that can slow up things dramatically, get messy. So fixed dollars are usually better, because $10,000 is $10,000. It's not a percent of anything. So that's just the check you write to the charity, you can do that almost immediately once you're sure you don't have a problem with having unpaid creditors and you're fine.
Other things that you might do, if you truly have charitable intent, then what you might do is do something like set up a charitable remainder trust. There are administrative costs to that but what it does is it can provide you with income for your life if you're old enough, right? And a current tax deduction, even though the charity will just get the remainder of what's in the trust when you die. There's all kinds of valuations that go in, actuarial tables are run to determine that. It works well, but I do suggest to people this is not something for $50,000. You know, need some bigger numbers there.
If you want to do it around that level, then maybe consider things like go to a charity that offers charitable gift annuities, which are a similar concept, but the charity takes care of most of the issues. They have lower costs because you're not having to care and feed for them. Some large charities will also do their own CRTs they have into it, but usually they're going to have a certain minimum because there's going to be additional compliance work for a charitable remainder trust rather than a charitable gift annuity. So usually that's going to require a bit more in funds, but charitable gift annuities, I've had clients use those for, you know, just more modest numbers. Just get a charitable gift annuity to a charity that they want to benefit.
And it's a trade-off. You get an annuity for life, but the payout's going to be lower than just buying an annuity because they're obviously, you know, there's supposed to be a remainder there for the charity at the back end. So that's kind of the structure to do but get some current benefits from them. Because again, as we already mentioned, with a $15 million estate and gift limitation, you know, that we can do tax free, we're probably not getting the state tax benefit from having a charitable contribution in the estate.
LO: We talked about bunching in the first part of the program, and bunching doesn't mean you have to stop annually supporting charities. A Donor Advised Fund, or DAF, is maintained and operated by a 501(c)(3) organization, but the donor retains advisory privileges. How do you go about setting that up and contributing with DAFs?
EZ: Okay. You're going to contact the DAF, right? You contact the people that do it. And like I say, a lot of the large brokerage funds have their own 501(c)(3) related. So you could like find a Schwab or a Fidelity or whoever. They'll have those things. You can contact those organizations also. You may find them associated with community foundations. You may have find them associated with some charities. We'll even have their own structures there, or related things or ones for groups of charities. And you just, you know, you contact them. You discuss what it is. They normally have at least some minimum. They don't want to deal with a $20 account because that's not really what this is meant for. You know, you can handle that on your own, they think. But you contact them and you give them a discussion about what they'll do, about setting one up for yourself so that you'll have your fund, donor advised fund. You'll make your contribution to that fund. And then, as I said, you're getting a pool of funds there. And the big advantage is that you are bunching all of the deduction in one year, which again, with the high standard deduction, you might need to do in order to get a real benefit there. And so when you do that, we get it bunched, we get our deduction.
But because the donor advised funds, we can like have those funds go out or advise the organization to have them come out over a period of time. So the charity, as mentioned, could still see that, you know, standard contribution that looks like normal. It wouldn't look like you cut them off. You gave a big donation. And by the way, when you give big donations to a charity, they kind of just expect it the next year, too. You'll notice you'll get that letter expecting, okay, “you're going to do this again?” It's like, “no, I doubled last year. That was kind of the point.” “You mean, I don't get it this year? It's like we budgeted for it this year.” It's like, no, okay. So you can be helpful to have the charity get it evenly so they don't anticipate getting that double check every year. We can do that. And you just, you know, you have it go out.
Again, you have to remember that technically, the donor advise funds has the right, you know, the charity, the 501(c)(3), has the right to make the distribution to some other fund. They could make that choice. They rarely do because probably people aren't going to donate to that fund if that fund never follows the advice when it's not illegal, you know, but they can't have to absolutely say it. So one thing to be careful of—or not careful of but, some people will get freaked out about this: Their acknowledgement to you has to say they retain the right to determine where the money goes. That will cause some people to get concerned. “Wait, wait, no, I thought I said where it goes.” Well, you advise and you're probably going to go where you say it goes. But that statement, if it's not on your acknowledgement, if you say, “get that off of here, I'm not going to give it to you unless you get rid of it,” you just lost the deduction. That has to be on your acknowledgement.
LO: So it's really part of the tax law. And then if you want to start another Donor Advised Fund, say, several years later, is there any restriction on that?
EZ: No. Because again, think about it, what a Donor Advised Fund is really doing is simply giving to a charity. Now, it's a charity that holds funds and then makes charitable contributions into those, gives it to other charities. That's its goal. So it's just a charity you gave money to. It's just, it's a different structure. It has to abide by slightly different rules because it is Donor Advise Funds, it has to operate under those rules in certain conditions. But it's really just another charity. It looks like for most purposes under the tax law, it looks like you gave it to what, American Red Cross, or you gave it to some other charity, a church, a synagogue. It just looks like you gave it to a charity because that's what you're doing. You're giving it to a charity.
NC: And when it comes to gifts of appreciated stock and charitable gift annuities, donated through a Donor Advised Fund program, how does this work for younger versus older donors?
EZ: Younger donors, in theory, it could work. There are some options. I generally see it with older mainly because that's the level at which they've actually accumulated enough to make it worthwhile. Also, younger people, if they have the home mortgage now, they're relatively well off so they could make such a contribution. They have the home mortgage. Well, they're not having trouble itemizing deductions because given home prices, interest rates these days, they're getting up to where they probably can itemize and they're, you know, they're not having problems getting benefits for their charitables.
Where I see people have problems getting benefits for their charitables? If they’ve paid off the home. We have a $10,000 cap, for deductions for taxes. Therefore, they had trouble clawing out of that hole to be able to itemize to begin with. So usually when the mortgage is gone, the acquisition debt, and when we've, you know, we don't really have maybe major income taxes anymore. We don't have some of the other stuff coming through because we're, you know, we're living on our investment funds. They have more trouble getting to the itemized deductions. So I see them use it more. If you're older, because they have the funds and they are more likely to have the problem getting, you know—because remember, especially now, you know, when you're married, you're over 65, your standard deduction has been inflated already by that. So yeah, it just gets tougher for them to qualify because kind of what the big things usually push you there, which like home mortgage interests, have come down in many cases already. You know, they like to have it paid off when they retire. A lot of people do that. They just don't feel comfortable, you know, having a mortgage when they retire. That's the group I often see that really wants to do like the Donor Advised Funds because it solves their problem of not being able to get any benefit for their charitable contribution.
But nothing stops you if you're younger and you've got the ability to do it, from using a DAF. You just have to ask yourself, given your itemized deductions already, does the Donor Advised Fund really provide you the benefit it provides your mom and dad?
LO: One process question. This fall, the IRS furloughed about half of its employees due to the government shutdown. Has the agency announced any plans or challenges for taxpayer services, processing returns, payments, and refunds this tax season?
EZ: In theory, they were hiring to do that, but they apparently have slowed up the training was what I'd last heard them say. So obviously, when you don't train people to do taxpayer services, that's not going to be the best taxpayer service you're going to see. So obviously, that's one of the issues that's there.
The timing of this was amazingly poor in the sense that this was just as the IRS was cutting off sending checks anymore for refunds. We lost people down there. So the timing was not great. They have already said you're not, if you didn't get your refund before the shutdown occurred, you're probably not going to see it unless you have electronic deposit and there's no problem, you filed your return electronically, and there is no problem discovered on your return. Even if it's a relatively minor, you never would have known it was a problem, but something the system wants somebody to look at, well, obviously there was nobody to look at it. So those returns got held up. So, and that backlog is going to cause big problems because the service is probably going to have to devote a lot of people to resolving that backlog, which then makes it even tougher to do taxpayer services.
NC: And it's probably a good reminder that regardless of any possible delays with refunds, there will doubtfully be any delays with when payments are due.
EZ: Right.
NC: And also just because you file an extension for your taxes does not mean it's an extension to pay on any tax liability of course.
EZ: Yep. IRS has announced all payment deadlines continue to work, whether or not the government's funded. You got to make your payments on time.
LO: And with all these tax law changes, is there anything else you want to let people know about as we near the year end?
EZ: Probably most the big thing that would probably be unanswered and in Arizona unanswered quite a while: What is the state going to do about conforming to these changes? Will the state follow them? Will we have differences? And that's likely to be significant because every state I know of that's looked at what it would cost to just follow all these federal changes are looking at very expensive amounts to follow them. And most have budget issues because, again, all the money that came in during COVID, the federal government was giving them all that's run out. And now, you know, they're facing budget issues at exactly the same time. If they follow the federal rules and follow the federal changes, they would end up losing.
You know, Arizona is estimated probably to be somewhere around $500 million per year. And that's not really probably available for the budget for them to just throw out $500 million. So that’s going to be an area of confusion you're going to have all through this upcoming tax season, depending upon your state. But Arizona, since the legislature doesn't come back into session till January, and because of that big budget cost, they're going to want to defer this until the end of the session when they know what the budget looks like. It's kind of tough to decide how much of this you can absorb. They've already decided what the budget is going to look like and how much money you need.
NC: Usually Arizona does follow federal. So this, if they do decide to, there could be a significant delay, if they decide to at all.
EZ: They’re going to want to try to follow what they can, they can afford to. But I think there's nobody who's going to say that we just absolutely can afford no question to follow the whole thing. That idea is probably dead on arrival at the legislature.
So now we're just going to have to see. And I'll just say traditionally, legislature has always just said when I had a case like this, we're just going to delay deciding what we're doing about the taxes until we got all the other budget stuff done. And then we got to figure out what can we afford to go along with, and what can't we afford to do that with.
NC: Ed Zollars, CPA, thank you so much for taking the time to join us. More information about Edward Zollars, CPA and Thomas, Zollars & Lynch, Ltd. Certified Public Accountants can be found at www.TZLCPAS.com. Thanks for taking the time to join us today.
EZ: Thank you.
Thank you for listening to Navigating Our Financial Times. This program is not intended to provide investment, tax, or financial advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The views and opinions expressed by guests are their own, and do not imply an endorsement or recommendation, or necessarily reflect the views of AZPM.
