Before TCJA (the new tax law), charitable deductions were a pretty easy piece of the financial puzzle. You chose your charity, donated a certain amount, and deducted that amount from your taxable income. Sure, giving pre-tax dollars was better, but even if you simply wrote a check to your charity of choice, you got a tax deduction. Oh, how times have changed! And those changes have me worried not only about the much-needed cash flow to charities, but also about the impact on our clients—especially those who give $1,000 or more over the course of the year. The good news: careful planning now can save you money on taxes in the coming years, and it can also help ensure your gifts are making a real financial difference to the organizations that rely on your help year after year.
The change that is likely to impact charities most is the increase in the standard deduction. The deduction for married couples filing jointly has nearly doubled, from $13,000 to $24,000. For single taxpayers and those who are married and file separately, the deduction will rise from $6,500 to $12,000. This increase presents a challenge when it comes to charitable giving. Because most taxpayers won’t exceed the standard deduction, they will no longer need to itemize. And without a direct tax benefit, charitable gifts may be much less attractive—at least from a tax perspective.
Luckily, there are strategies to help charitable donors maintain a tax advantage while continuing to support the good work of the organizations they support. Here are three options to consider today:
- “Bunch” your gifts to deduct years of gifts in a single calendar year.
If you have the cash on hand, you can bunch multiple years of gifts into one tax year. If you’re single, your standard deduction is now $12,000. Let’s assume your property taxes are $6,000 and your state income tax is $5,000, equaling $11,000 in deductions. If you then give $1,000 to charity, even though you max out your standard deduction, you receive no tax benefit. However, if you plan to give $1,000 each year for the next five years, opting to give a lump sum of $5,000 in 2018 will result in a taxable deduction of $4,000 beyond the standard deduction. Your charity of choice will benefit from the lump-sum donation, and so will your wallet come tax time next year. The only limit is that you can only deduct cash donations of up to 60% of your Adjusted Gross Income (AGI) in a single year. (And you can still use appreciated securities to fundthe donation.)
- Create your own “charitable foundation” using a Donor Advised Fund.
If your contributions to a particular charity are large, it may make sense to set up a DAF, or Donor Advised Fund (it’s easy, and yes, we can help!). A DAF allows you to make a lump-sum donation to take advantage of the up-front charitable tax deduction in the current year. But unlike bunching contributions in a single year, the DAF gives you the flexibility to spread your gift out over time. You can even name your children as “successor grantors” for the fund to effectively pass down the assets of the fund tax-free and help support their own gifting in the future. (And you can supercharge the contribution to your DAF by gifting appreciated securities.)
- Give via a Qualified Charitable Distribution.
If you’re over 70½, a Qualified Charitable Distribution (QCD) allows you to give to your charity of choice with pre-tax money, while also reducing your taxable income. It is a method of giving that saves you taxes twice. For example, let’s say you have an IRA with Charles Schwab and your RMD (Required Minimum Distribution) from your IRA is $20,000. Using a QCD to make your annual $1,000 pledge, Charles Schwab writes two checks: one for $1,000 that goes directly to your charity for it to use tax-free, and another for $19,000 that goes directly to you as taxable income. The QCD amount (up to $100,000 annually to any qualified charity) is excluded from your adjusted gross income, and you benefit from a full $12,000 standard deduction. It’s a great way to optimize tax savings compared to using a typical after-tax IRA distribution. You can use a QCD to give up to $100,000 annually—even if that amount exceeds your RMD. Note: you can’t request a QCD until you hit that magic age of 70½. It’s one of the perks that comes with age!
One last note: If charitable giving is part of your legacy planning, donating assets from your IRA is often a smart option—the charity can use the gift tax-free, and your heirs won’t pay a dime in taxes on your gift.
In the face of the new tax laws, careful, multi-year planning is more important than ever. That’s especially true when giving to charity. But by making ‘doing good’ an intentional piece of your overall financial plan, you can use tax law to your advantage to make every dollar count and, most importantly, continue to support the charitable organizations that are making a real and positive difference in our world today.