In this season of giving, charitable gifts may bear the brunt of tax reform. Changes in the law will reduce the number of taxpayers who benefit from their charitable tax deductions. While most give to charity for reasons other than tax incentives, the deduction allows folks to give a little more than they would otherwise. Luckily, there are strategies to preserve the popular tax break.
Good news, bad news, good news
Good news: Tax reform gave us a beefier standard deduction. You probably paid little attention to it before now. When filing your tax return, you have two options: take a standard deduction or itemize deductions. Generally, you pick the larger of the two options to reduce taxable income. The 2018 standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples. Itemized deductions are now mainly limited to mortgage interest, state and local taxes (capped at $10,000), and charitable donations. Many individuals who previously itemized will go with the larger standard deduction.
Bad news: Without itemized deductions, most taxpayers will lose the tax benefits from charitable giving.
Alas, there is still good news: Planning opportunities are available to help individual taxpayers maximize the tax benefits of their charitable contributions.
If you are trying to hurdle the standard deduction and cash is available, bunch deductions every other year. Simply time the payments of donations to maximize itemized deductions in one year, then take the standard deduction the following year.
Consider a married couple claiming the maximum property and state income tax deduction of $10,000 and a mortgage interest deduction of $12,000. They will need at least $2,000 of charitable donations in order to hit and surpass the $24,000 standard deduction. If their annual contributions are normally $2,000, they can bunch two years of charitable gifts into one tax year. They itemize deductions one year and take the standard deduction the next.
If your contributions are large, it may make sense to set up a donor-advised fund. A DAF allows you to front-load your charitable tax deduction in one year with a lump-sum donation. Once established, you can make contributions to charities out of the fund’s assets at any time, over many years.
Supercharge your donations by gifting appreciated assets such as stocks. Realize a double tax benefit – avoid capital gains taxes on the appreciated assets and claim the full value of the assets as a charitable deduction. This option may allow you to boost your donation since taxes are dodged on the gains.
Qualified charitable distributions
If you’re over age 70 ½ with IRA assets, make a qualified charitable distribution. A QCD is a direct transfer from your IRA to a qualified charity, which counts toward your required minimum distribution or the annual amount you must withdraw from your IRA. You can use a QCD to give up to $100,000 annually, even if that amount exceeds your RMD. The QCD is a smart way to donate to a charity with pretax money, while also reducing your taxable income even if you cannot itemize deductions. Lowering your taxable income may also minimize the tax impact on your Social Security income, certain credits and deductions.
The bottom line
In light of tax reform, it’s important to assess old rules of thumb. What once worked may no longer make sense or may require a new approach. Seek a knowledgeable CPA who can help you use the new tax law to your advantage. Various strategies can boost your charitable gifts, which make a positive difference in our community. ￼
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at firstname.lastname@example.org or 324-4971. The views expressed are her own.