Under the previous tax code, charitable giving was fairly straightforward. For most of our clients, a dollar in charitable donations offset a dollar in income, reducing the income tax by the marginal tax rate for the federal and state level. With the recently passed legislation, far fewer tax payers will have such a simple donation/income offset because far fewer tax payers will itemize deductions. The higher standard deduction ($12,000 individual, $24,000 married filing jointly) coupled with the state and local tax cap of $10,000 and elimination of miscellaneous itemized deductions will mean that deductible expenses will have to cross a higher threshold before they have a direct impact on reducing taxes.
Three strategies can help charitably-minded taxpayers to optimize their tax outcomes while continuing to support the organizations that rely on their generosity.
Using this strategy, individuals predetermine whether a given year is an “itemizing” year or a “standard deduction” year. In “itemizing” years, charitable contributions are accelerated. In “standard” years, contributions are deferred. For example, if an individual determines 2018 is a “standard” year and 2019 is an “itemizing” year, the 2018 year-end contributions would be postponed until January 2019, while the 2019 year-end contributions would still be made in December 2019 – effectively having two years of contributions on the 2019 tax return.
Donor Advised Funds
When combined with charitable bunching, donor advised funds allow clients to bunch several years’ worth of contributions onto one tax return. This may be especially useful if a taxpayer has a one-time income event (such as a business sale). Using either cash or appreciated securities, taxpayers can fund an account that is to be used only for charitable purposes and get the tax benefits in the year the account is funded. Yet the distributions to charity can happen at a future date. In bunching with a donor advised fund, the taxpayer gets the benefit of itemized deductions in a high-tax year while the organizations get the benefit of annual gifts received at the direction of the account holder.
Qualified Charitable Distributions (QCDs)
Taxpayers who are required to make distributions from their IRAs due to reaching age 70 ½ can instead have those distributions directed to qualified charities. In doing so, the taxpayer does not realize the income they would otherwise put on page one of their tax return. QCDs are limited to the amount of the Required Minimum Distributions (RMDs) for a given year and cannot be “bunched.” QCDs allow for tax deductibility of contributions in standard deduction years.
Depending on individual circumstances and goals, any one of these strategies alone or all three of them combined, can help taxpayers achieve their planning objectives while optimizing taxes.