Navigating Charitable Giving With the New Tax Law Policies
October 2, 2018
Years ago, Holiday Inn ran a highly effective ad campaign which featured the tagline “the best surprise is no surprise.” Unfortunately, because of the Tax Cuts and Jobs Act (TCJA), many tax filers will be in for a big surprise next year.
For example, many taxpayers will discover that they are no longer receiving a tax benefit for their charitable giving. According to The Tax Policy Center the impact will be huge, estimating that only about 16 million households would file itemized deductions for their charitable giving this year – a stunning 21 million fewer than in 2017. And that, in turn, could slash U.S. donations by as much as $12 billion to $20 billion. Let’s be honest – we all feel good about “doing good,” and those good deeds feel even better when there’s an accompanying tax benefit.
Fortunately, there may be ways that you can still accomplish both the good feelings and associated tax benefits. Below, we discuss some strategies that might prove helpful.
A Closer Look at the Changes
The passage of the TCJA late last year resulted in some significant tax law changes – the most dramatic being a near-doubling of the standard deduction from $12,700 (married filing joint) to $24,000. The standard deduction for other filing status’ is now $12,000.
Here’s what this means. If all of your “below-the-line” deductions (charitable giving, mortgage-interest deductions, and state income and property taxes paid) add up to less than $24,000, you will no longer itemize – meaning you will receive no tax reduction for these expenses.
And that’s not all. You see, the total deduction allowed for state income and property taxes paid is now capped at just $10,000 – a fact that makes it even less likely that you will itemize.
To illustrate – let’s suppose you previously paid $6,000 in property taxes and $15,000 in state income taxes – a total of $21,000. Under the new tax law, your total deduction for these two items is limited to just $10,000.
According to recent Internal Revenue Service data, about 30% of tax filers in the U.S. had enough of these deductions to itemize on their tax return prior to TCJA. This means roughly 30% of tax filers were able to receive a tax benefit for their charitable giving. It’s a very different story under TCJA, however. According to the latest estimates, the number of filers who will itemize has been slashed from that 30% to just 7%. In other words, only 7% of all tax filers will get any tax benefit from their donations or other giving.
Strategies to Consider
If you typically give more than $5,000 per year to various charities, consider setting up what’s called a donor advised fund (DAF) and accelerating or pre-paying your next few years’ of normal giving to fund that account right now. You can open a DAF then contribute or “donate” $25,000 – enough for five years of average giving. This works because the DAF itself is a qualified 501(c)(3) charity – meaning you receive a charitable deduction in the year you make the contribution.
Then you can stick to your normal pattern and make $5,000 in yearly grants to your favorite charities over each of the next five years – telling the DAF which charities should receive the funds (the recipients must also be qualified 501(c)(3) charities).
There’s even a kind of “deal-sweetener strategy” you can employ here. You can actually gift (to the DAF) shares of stocks, mutual funds, or other investment securities you own that have experienced big price run-ups. You get the benefit of the deduction of the current market value – and you avoid capital-gains tax obligations.
If you’re over the age of 70½ and have an IRA account, consider making what’s called a “qualified charitable distribution” (QCD) to your charity. As you may know, people meeting that description must take their “required minimum distributions” (RMDs) from their account each year. This distribution is usually viewed as taxable income to the IRA owner. And it could increase their Medicare premiums and the tax liability on their Social Security income. With a QCD, you are permitted to give as much as $100,000 a year directly to a charity from your IRA. The QCD counts towards your RMD for the year, but is not included in your taxable income.
For seniors, this strategy can offer tremendous benefits, including:
- Avoiding the tax burden on both ordinary income and Social Security benefits, and dodging the potential for higher Medicare premiums.
- A de facto “above-the-line” tax deduction – instead of the less-beneficial “below-the-line” charitable deduction (the latter only being available if you have enough deductions above the current standard-deduction amount of $24,000).
- Your favorite charities continue to benefit from the donations received.
With the new tax law there is what may seem like a daunting amount of information to consider. The SC&H Financial Advisors team continues to monitor the updates and are more than happy to discuss ways in which we can help you as you are navigating the new tax law policies.
Advisory Services offered through SC&H Financial Advisors, Inc.