Do you give to charity? Here’s how to make every dollar count under the new Tax Law
Our team has been spending time preparing for our upcoming Tax Seminar on March 6, and one of the big questions that has come up during our discussions with our partners at Gruber/Kingsley CPAs is how our clients can make charitable donations count under the new Tax Law. This is important not only for those of us who make sizable annual donations to church and other charities, but also for the charities themselves, many of whom are concerned that overall giving may drop as a result of changes to the tax law.
If you haven’t heard, one of the big changes to your taxes next year will be the increase in the standard deduction. The deduction for married couples filing jointly has nearly doubled, climbing from $13,000 to $24,000. Single taxpayers and those who are married and file separately are seeing a similar jump from $6,500 to the new $12,000 standard deduction.
Although anything that simplifies the filing process is generally considered a plus, the change has made it more challenging to receive tax deductions for charitable gifts. While in the past most people typically hit the standard deduction fairly easily (especially because it included mortgage and tax deductions that have now been significantly reduced), it will now be less common to exceed the standard deduction. The result: many people won’t be itemizing their deductions under the new law. And without itemization, charitable gifts can seem much less attractive from a tax perspective.
The good news is that there are ways to help make every charitable dollar count. Here are three easy-to-implement options:
- Give multiple years’ worth of gifts in one calendar year. Bunching your annual gifts can help ensure your gifts aren’t “wasted” from a tax perspective. Let’s assume you give a generous $20,000 a year to your church. Under the new law, if you give that gift in a single-year period, you may not exceed the standard deduction, and it won’t reduce your tax bill. Instead, if you have the money available, consider giving a lump sum of $60,000 to cover the next three-year period. Your church will be thrilled, and you will reap the tax benefits. The caveat: cash donations up to 60% of your AGI (adjusted gross income) may be deducted in any one year, so your AGI must be at least $100,000 in the year you make the $60,000 gift to get the full deduction.
- Set up a Donor-Advised Fund. This is another smart way to bunch your charitable donations. You can donate your $60,000 to a Donor-Advised Fund (DAF) in one lump sum to take advantage of the current-year tax deduction. You then have the flexibility to decide when you want to parse out those funds—and to whom—in the future. Plus, you can make your children successor grantors for the DAF, and you can even use it as a powerful tool to help teach them stewardship. Once the DAF is funded, hold family meetings to discuss and agree upon where the funds should be directed each year. I call these “family foundations for regular folks” because they are low-cost ways to get similar benefits.
- If you’re over 70½, use a Qualified Charitable Distribution. A Qualified Charitable Distribution (QCD) has always been a smart tool for retirees, but it can be even more important under the new tax law. A QCD allows individuals over 70.5 years of age to donate as much as $100,000 of tax-deferred IRA savings annually to any qualified charity. Plus, that money is not included in your adjusted gross income. This means that a QCD contribution can help reduce your taxes by not wasting the charitable deduction. Let’s say you contribute $10,000 of your Required Minimum Distribution (RMD) directly to charity. By doing so, that $10,000 is subtracted from your taxable income on page 1 of your tax return, reducing your Adjusted Gross Income. Because the charitable donation was made using a QCD, you still get the full $24,000 standard deduction, and your taxable income is reduced by the $10,000 QCD contribution, giving you $34,000 in deductions. This could save around $3,000 in taxes over just paying an after-tax IRA distribution to charity that does not exceed your standard deduction.
Note that you can use a QCD to give up to $100,000 annually—even if that amount exceeds your RMD. One restriction: you can’t direct your donation to a Donor-Advised Fund.
Of course, these are just the strategies that stand out for managing charitable contributions. Other important changes impact things such as:
- Medical expenses. In 2018, you can only deduct costs above 7.5% of your AGI. In 2019, that limit rises to 10%. Those numbers will make it wise to consider bunching elective surgeries into a single calendar year if possible in an attempt to exceed the new higher standard deduction.
- New child tax credit. The new law takes away personal exemptions, which I thought would penalize large families, but I may be wrong if you have children under age 17. Here is why: While the personal exemptions went away, the child tax credit was increased from $1,000 to $2,000 per child. And, remember, a credit is much more valuable than a deduction (exemption) as a credit is a dollar-for-dollar reduction in taxes while the exemption only reduces the income that is taxed. Plus, the income limit to receive those credits was raised from $200,000 to $400,000 (married/filing jointly). That means families with dependent children under age 17 will receive a significant dollar-for-dollar deduction on their returns. That’s great news for large families!
In theory, the new Tax Law was supposed to make our lives simpler but, as is almost always true when it comes to the tax laws and the IRS, it is anything but simple. If you’d like to learn more about the new law, how it will impact your own finances, and strategies that can help you make 2018 as tax-wise as possible, please join us on March 6 at our 2018 Tax Seminar with Gruber/Kingsley CPAs. And as always, if you have any questions at all, please reach out. We’re always here to help.