The Tax Cuts and Jobs Act passed by congress in late 2017 came with a lot of changes. Among the most notable is the raising of the standard deduction to $24,000 for couples, $12,000 for singles, and $18,000 for household heads. This is almost double what the standard deductions were before the new law. According to Evan Beach, CFP® of Campbell Wealth Management in Alexandria, VA, this raise in the standard deduction makes it so that only about 10% of people filing their returns will see any value in itemizing their deductions. In other words, if they were to add up their charitable donations, mortgage interest, and other deductions, it still wouldn’t get close to the $24,000 amount so they’ll just take the standard deduction for a more advantageous return.[i]
It is estimated that 31% of non-profit donations come in during the month of December.[ii] The reason is clear—these donors are seeking a tax advantage to their charitable gifts. This poses a challenge for non-profits such as private schools, churches, community centers, and human aid and relief organizations, etc. who rely on charitable gifts for their operations because donors will see less of a tax advantage to charitable giving under the new law.
If you are involved with a non-profit or are considering donating to one this year, there are still some strategies that you can implement to maximize your charitable contributions both for the non-profit you give to and for your personal tax return. Here are four strategies you can utilize going forward.
1. Qualified Charitable Distributions. Once you reach age 70 ½ you are mandated to take Required Minimum Distributions from your traditional IRA or 401(k) accounts. These “RMDs” are taxed when they come out to you, however if you gave them directly to a qualified charity of your choice, there is no tax liability. Instead of taking the distribution and then writing a personal check to the non-profit, your custodian would write a check directly from your retirement account to the charity. You are not taxed on this gift at all and as a result the amount donated to the charity increases significantly.
2. Gifting of Appreciated Stock. If you own single stocks of a company and you wanted to cash them out you’d be liable for personal income tax on your basis (what you originally bought the stock for) and capital gains tax on the appreciation of the stock since your original purchase. If however, you gave the stock directly to a non-profit, you’d be liable for no tax and it may help your deductions get above the standard deduction benchmark so you could itemize.
3. Donation lumping. If you don’t have enough deductions to itemize then you can take a standard deduction one year and strategize to lump together a bunch of itemized deductions for the following year. For instance, if you give $3,000 a year to your local charity that may not be enough to, in addition to your other itemized deductions, get above the $24,000 mark. But if you lumped 5 years worth of donations into one year and gave $15,000, that, in addition to your mortgage interest, SALT taxes (state and local taxes), and other itemized deductions gives you a greater chance of getting above the $24,000 mark, which would reduce your tax liability. For more detailed information on donation lumping you can read Michael Kitces’ article here https://www.kitces.com/blog/deduction-lumping-charitable-clumping-tax-savings-itemized-vs-standard-deduction/.
4. Charitable Remainder Trusts. A charitable remainder trust is an irrevocable trust which pays money to beneficiaries for a set amount of time and then the balance goes to a specified charity. This can be especially beneficial when considering estate planning, planning for a pet, loved ones, or a favorite non-profit. The funds originally donated to the trust are tax-deductible.
For more information about how to implement some of these strategies contact us. We at American Financial Planning would help you with the next step.
[i] https://www.onefpa.org/journal/Pages/AUG18-How-to-Use-the-TCJA-to-Build-Your-Business.aspx
[ii] Ibid.