A Season for Giving

With the holidays upon us, charitable giving is on many people’s minds.  While the tax deduction is often a secondary consideration when giving, it is always a plus when your generosity is also tax deductible.  While the Tax Cuts and Jobs Act of 2017 (TCJA) did not directly change the deduction for charitable contributions, there were two very significant indirect changes.  First, the standard deduction is now $24,000 (married, filing joint).  Second, state and local taxes (SALT) are capped at $10,000 in total.  It is estimated that 1/3 as many taxpayers will claim itemized deductions for 2018.  Below are some strategies to make those charitable contributions deductible in 2018. 

Bunching

Bunching simply means grouping one or more years’ worth of contributions in one year.  Let’s say you have $8,000 in mortgage interest, and $10,00 in SALT, for a total of $18,000 in itemized deductions.  If you give $5,000 each year to a charity, that $5,000 is not deductible.  If you “bunch” two years together, and give $10,000 one year (perhaps in December), you now have $28,000 in deductions.  The following year you would have no charitable contributions, and take advantage of the higher standard deduction.

Donor-advised Fund

A donor-advised fund is a dedicated account for charitable giving.  When you contribute to a donor-advised fund, the contribution is immediately deductible.  The funds are then granted to public charities over time.  The contribution can also grow tax-free while in the fund.  Much like with “bunching”, this allows a taxpayer to take a larger deduction in one year, while also spreading out the contribution to the charities. 

Donating Highly Appreciated Assets

The benefits of this strategy haven’t changed much, but it can still be a very significant way to maximize your charitable giving.  This concept involves donating assets, such as stock, that have significantly appreciated while you have owned it.  For outright gifts, you avoid paying capital gains tax on the appreciation, and can claim the full value of the asset as a charitable contribution. 

Qualified Charitable Distributions

Taxpayers who are over 70 ½ years or older and are required to take a minimum distribution from their retirement account may request the administrator make a distribution directly to a qualified charity.  While there is no charitable deduction for this contribution, the income from the distribution is not taxable.  It is a wash for the taxpayer, while the charity receives a nice gift. 

While many people will not have the TCJA in mind when giving this holiday season, planning your charitable contributions can have a significant impact on your tax burden.  Receive a tax deduction is an added bonus to doing good.  It is advised that you consult a tax professional before utilizing any of these strategies.