By Dave Coen
Do you remember the days when you could give generously to others and get a nice tax break as an added benefit? Even if you didn’t donate money for the sole purpose of saving on your taxes, it was a nice perk come tax time. Unfortunately, under the new Tax Cuts & Jobs Act, a whole lot of people will lose out on all tax benefits associated with charitable giving.
Here’s why, and what you can do about it.
It’s All About The New Standard Deduction
Charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes.
In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2018, the standard deduction for a single filer had almost doubled to $12,000. That means that a taxpayer needs to have over $12,000 worth of property and state taxes, interest payments, and charitable giving in order to receive any tax benefit from their donations.
The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions. A congressional report estimates that in 2019, 88% of the households that file taxes will take the higher standard deduction and that only 18 million households will itemize, down from 46.5 million last year. (1)
But There Are Some Incentives…
The new law also increases incentives for giving, especially if you are a high-income earner. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI.
Then there’s the Pease limitation. If you haven’t heard of this, here’s an explanation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. The new tax law repealed this limitation, meaning that high-income taxpayers are no longer limited in their total charitable deduction and can keep more of their itemized deduction.
Can I Still Get A Tax Break?
If it makes more financial sense for you to take the standard deduction, you might think you have to wave goodbye to your tax break for your generosity. But there is a way around this obstacle, and that is by bunching your giving or doing several years’ worth of giving in one year.
For example, let’s say you are a single taxpayer who usually donates $6,000 a year and you have $5,000 worth of taxes and interest payments that are deductible. If you itemize, your deductions will total $11,000, which is less than the standard deduction. As such, you would take the standard deduction and miss out on the benefits of your charitable giving.
Or, you could bunch your giving and only make donations every other year. In year 1 you wouldn’t donate anything, so you would take the $12,000 standard deduction. In year 2, you would give double and be able to itemize for a deduction of $17,000. If you repeat this pattern every other year, then you will get an extra $5,000 of deductions every other year that wouldn’t be available to you if you gave yearly.
Another Option: Donor-Advised Funds
A vehicle to help you carry out the bunching strategy comes in the form of donor-advised funds (DAFs). These work just like charitable savings accounts. You put money into the fund and then distribute it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.
With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years.
Does It Matter If I’m Already Retired?
If you are older than 70½ and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it doesn’t count as taxable income to you.
With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to take advantage of this strategy.
Give To Your Heart’s Content
Tax changes are enough to give anyone a headache, but that doesn’t mean you have to let the implications of the new tax law change your giving habits. You can still give back and receive tax benefits for it. If you want to know more about how to get the most out of your charitable giving or have any questions about the strategies mentioned here, our team at College Planning America is here to help! Get started by emailing me at dcoen@sageviewadvisory.com or calling 800-814-8742.
About Dave
Dave Coen is a Financial Advisor with SageView Advisory and the CEO of College Planning America. Along with his retirement financial industry experience, he is a College Planning Specialist. He works closely with individuals and families to provide them comprehensive financial planning that addresses all elements of their financial picture. Learn more by connecting with Dave on LinkedIn.
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(1) https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/
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