Charitable giving strategies and tax deductions are top-of-mind as we near the end of 2018. This year is especially fraught as a result of changes brought about by the Tax Cuts and Jobs Act (TCJA). Many nonprofit organizations are concerned that the new tax law will result in reduced charitable giving by Americans.
We don’t yet know the full impact, but nonprofits are right to be concerned. Even though TCJA did not result in significant direct changes to charitable donations rules, there is a large indirect change as a result of the new standard deduction.
Changes in Deductions
Before TCJA, almost 70% of taxpayers took the standard deduction instead of itemizing deductions on their tax return. With the standard deduction jumping to $24,000 for a married couple in 2018 ($26,600 for a married couple both over the age of 65), and a new limit of $10,000 on the deduction of state and local taxes, tax experts expect the vast majority of filers to claim the standard deduction.
What does all of that have to do with charitable donations? If you don’t itemize your deductions, you cannot claim your charitable donations. That means that individuals who give a few hundred or a few thousand dollars each year, but who do not reach amounts significant enough to outstrip the value of the standard deduction, will receive no federal economic benefit on their tax return.
Strategies around maximizing the value of charitable donations still exist. A few to consider:
- Gifts of appreciated assets, like stocks or mutual funds. By gifting these assets instead of cash, you may receive a tax deduction for the value of the shares (subject to the limitations previous explained). As an added benefit, you avoid recognizing costly capital gains and the charity won’t pay taxes on gains when the asset is sold.
- Bunching charitable contributions and/or using a vehicle like a donor advised fund (DAF). Bunching contributions means making bigger gifts in one year instead of spreading them out over multiple years. Donor advised funds are accounts that are set aside for charity, but that can make multiple gifts over a multi-year time frame. The taxpayer is able to claim the deduction in the first year, while spreading the gifts over multiple years.
- Qualified charitable distributions of Required Minimum Distributions (RMDs). IRA owners who have reached age 70½ are required to take taxable distributions from IRAs each year. When the money is not needed for living expenses and charitable goals are important, taxpayers can consider donating distributions from IRAs directly to an organization of their choosing. Up to $100,000 per person per year can be gifted directly from an IRA to a qualified charity, and the distribution counts towards meeting one’s RMD. The strategy allows you to avoid the tax burden on the distribution, gift more to charity, and improve your overall tax situation.
Here’s an example
Let’s look at an example of the bunching strategy: Let’s say you have $20,000 of deductions as a married couple and you choose to donate $5,000 to charity. A $5,000 donation would only decrease your taxable income by $1,000. ($20,000 plus $5,000 equals $25,000. The standard deduction is $24,000. The savings is the difference between the itemized deductions and the standard deduction ($1,000).) If you were to bunch a few years of donations into one, you could achieve a better outcome. If you intend to gift $5,000 each year for three years, and you have the ability to make three years’ worth of donations in one year, you could donate $15,000 in one year. When you add your $20,000 of deductions to your $15,000 of donations, you’ve made a meaningful difference to your tax situation. In the following years, you claim the standard deduction without making charitable donations. The net result is multiple years of reduced taxes and the achievement of charitable giving goals.
How we can help
Charitable giving is a significant priority for many Americans. Despite the changes we’re seeing in the charitable giving landscape, good planning options still exist. As we approach the end of the year, now is the time to evaluate your giving goals and your tax situation. We will be pleased to help you achieve an outcome that is a benefit to both you and to the charities that are important to you.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.