Under the Tax Cuts and Jobs Act, far fewer taxpayers will itemize their deductions when filing their tax returns for 2018 and beyond. This has sent many charities into a bit of a panic as many would-be charitable givers may no longer be incentivized to give.
The new tax law nearly doubles the standard deduction to $12,000 for singles and $24,000 for those married filing joint. In addition, the deduction for the combination of property taxes and state income taxes is limited to $10,000. This means it will no longer make sense for many taxpayers to itemize.
There are alternatives in charitable giving that will still allow for a tax deduction, however.
The most simplistic strategy is to “bunch” your charitable contributions. That is, make two years of contributions in a single year to reach the threshold of itemizing deductions. Then you skip donating in the next year and revert to taking the standard deduction. Charities may not be thrilled with this approach, but you can still space out your contributions to the beginning and end of the year to lend to stability.
A second strategy that can be used by those 70 ½ or older is the Qualified Charitable Distribution. This allows taxpayers to donate to charities directly from their traditional IRAs tax-free. The donation will count as your required minimum distribution without being added to adjusted gross income. A taxpayer can donate up to $100,000 per year using this approach.
Another less-thought-of benefit of employing this strategy is reduction of adjusted gross income and its far-carrying impacts. A lower AGI can mean exemption from Medicare surcharges as well as reducing the percentage of Social Security benefits that are subject to tax. Be careful though, the donation must be made directly from the IRA; it cannot be a distribution that is cashed and then donated.
A third vehicle is the donor-advised fund. A donor-advised fund is a charitable giving vehicle that is administered by a third party and created for the purpose of managing charitable donations on behalf of an individual. A taxpayer will set up a fund, typically with their financial advisor, and make an irrevocable contribution of personal assets. The taxpayer will get an immediate tax benefit for the contribution, up to the maximum-allowed IRS limit, and can then recommend grants to charitable organizations from the fund over time. The assets will continue to grow tax-free over time until distributed to organizations as the taxpayer dictates.
The benefit here is of course the immediate tax deduction, yet the donations will continue to be made for years to come. A taxpayer may also want to consider donating appreciated stock into a donor-advised fund. This will allow them to avoid capital gains tax on the sale of the securities and the deduction will be for the fair market value of the securities, rather than the cost.
Tax reform has forced us to take a step back and explore all available tax minimization strategies. As always, it is recommended to consult your tax advisor to determine the strategy that will be most beneficial to your personal situation.
Kristina S. Stamatis, CPA, is a partner with Mengel, Metzger, Barr & Co. LLP in Rochester, New York. She may be reached at [email protected]