Resulting from the Tax Cuts and Jobs Act of 2017, it is more difficult to claim the tax deduction for charitable contributions. However, there are techniques available to plan your giving to hold on to the popular tax break.
Being charitable is often its own reward. However, reaping the tax benefits is a nice perk.
While taxes might not have been at the forefront when providing aid to others, the tax deduction for charitable contributions has typically helped reduce your tax bill if you itemize deductions instead of taking the standard deduction.
How charitable giving deductions have changed
But under the new Tax Cuts and Jobs Act, that threshold is more difficult to clear. Although the deduction for donations is unchanged, you’ll still need to itemize to claim it, and that’s a much higher bar with the nearly doubled standard deduction.
Under the legislation, an individual would need total itemized deductions to exceed $12,000, the bill’s new standard deduction for individual taxpayers, up from the current $6,350. Married couples would need deductions exceeding $24,000, up from a current $12,700.
Strategies for charitable giving for tax benefit
For charitable donors who are not ready to let go of the tax benefits, there are still several ways around the new rules. Here are four techniques you might consider.
Strategy: Bunching
First, try a strategy called “bunching.” Rather than contributing to your charities every year, give greater amounts every other year. For example, instead of giving $5,000 to a charity annually, accelerate the gift by giving $10,000 every two years. This allows you to get your itemized deductions over the limit one year and take the standard deduction the next.
If timing or cash flow is an issue for either you or the charity, time your contributions so that one half is made at the beginning of the year and the other half is made just before year end. The contributions are received by the charity almost one year apart but within the same taxable year for you.
Strategy: Donor-advised Fund
Another technique is utilizing a donor-advised fund. Contributions to a donor-advised fund lets you make a charitable contribution and receive an immediate tax break for the full donation. Then, recommend grants from the fund to your favorite charities over time. You can put in $10,000 and get a one-time tax deduction and spread your donations out to the charities you support.
Strategy: Direct from IRA
Third, retirees, age 70½ or older, might consider transferring money directly from their IRA to a qualifying charity. Such qualified charitable distributions can be a tax-efficient way of meeting your required minimum distribution and you don’t need to itemize your deductions to benefit.
Strategy: Donate appreciated assets
Lastly, consider making your charitable contributions by donating appreciated assets rather than cash. Contributing appreciated assets to a charity may help you avoid capital gains tax on your assets. Examples of appreciated assets you might consider are stocks that appreciated in value, artwork, antiques or other assets which have grown in value.
Depending upon your particular tax situation, transferring money directly from an IRA and/or donating appreciated assets may also be beneficial in reducing the tax on your Social Security income by keeping your adjusted gross income lower than it would have been other-wise.
Of course, you can always give to charities without concerning yourself with the tax break. If you have any questions, get in touch with me.
Dan