Just a year ago, the Tax Cuts & Jobs Act was all the rage. Though it no longer holds the public spotlight, it is actually now that we are starting to feel its effects. Tax season was just upon us, and there were changes in store for just about everyone.
One area in which the new tax law is definitely changing things is charitable giving. The new, higher standard deduction is what most are focused on, fearing that it will negatively affect charitable giving. However, what many don’t realize is that there are also provisions in the new law that actually increase incentives to give. Here is a look at the effects of the new tax law and some of the options you should consider for your charitable giving.
How The Higher Standard Deduction Affects Giving
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.
Increased Limits On Charitable Deductions
The new law also increases incentives for giving, particularly for high-income earners. 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.
In addition, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.
Bunching Charitable Giving
How the law affects your own personal giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may be able to still benefit from giving while also taking advantage of the higher standard deduction. You can do this 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.
What if, instead, you bunched your giving and only made 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.
One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then disperse 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.
Giving Opportunities In Retirement
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 does not 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 utilize this strategy.
Get The Most Out Of Your Giving
Now that this new law is active, we are finally going to see what the real effects are. No matter how it affects you, whether you go standard or itemized, the important thing to remember is that it doesn’t need to deter your generosity. You can still give back and receive tax benefits for it. If you would like more guidance on how to get the most out of your charitable giving or have any questions about the strategies mentioned here, we at 1on1financial would love to talk to you! Call our office today at 909-981-1720 or simply click here to schedule a free 15-minute introductory phone call! Together, we can strategize your generous giving to maximize the benefit for both you and the world around you!
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses throughout the United States. He is also the owner and CEO of Medi-cal Benefits.