Big Changes in Federal Tax Laws Have Not Reduced Charitable Deductions
The Tax Cuts and Jobs Act (ACT) went into effect on Jan. 1, 2018. It will take several years to figure out the full impact of the ACT, but areas such as charitable deductions are clear. With the cap on state and local taxes of $10,000, the standard deduction for a single taxpayer increased to $12,000, and a married couple to $24,000 much has been made about itemized deductions and particularly charitable deductions availability. Charitable deductions are alive and well. The ACT does require a different approach to charitable deductions than prior to 2018, but the amount that can be deducted in a given tax year increased by 10%!
All of the charitable deductions available in 2017 continue.
Donor Advised Funds
Many contributions under the Act will find their way to donor-advised funds, which offer an immediate tax benefit for the taxpayer’s irrevocable contribution. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting the charitable organizations of your choice. Several large financial institutions have donor-advised funds. Donor-advised funds can be funded through gifts of cash or (even more beneficial) appreciated securities. Taxpayers are generally eligible to take an immediate tax deduction. The money is later directed through grants to the charities of the taxpayer’s choice. Interest in these accounts surged at the end of 2017 as taxpayers realized that itemizing in 2018 will be more complicated.
IRA Donations Continue
One of the best charitable deduction opportunities permits anyone 70½ or older to make a direct transfer of IRA balances up to $100,000 per year to a charity. For most donors, qualified charitable distributions make it possible to net outstanding tax benefits because the amount of the distributions will not be included in his or her adjusted gross income (AGI). Because income taxes would be due on the amount distributed this strategy offers a valuable benefit to those who were planning to make the donation without the incentive. The qualified charitable distribution may also be applied toward the taxpayer’s required minimum distribution, thus increasing the value of the deduction to the donor.
Bundling Charitable Deductions
Another option, bundling of charitable deductions, is emerging as a hot topic in financial planning circles and is seen as a valuable charitable strategy under the Act. The strategy is simple, instead of giving $5,000 per year over five years to a charity, a taxpayer may “bundle” a gift of $25,000 in one year. This amount exceeds the new $24,000 standard deduction, thus providing a tax benefit for the contribution. When combined with an IRA donation and the $10,000 deduction for state and local taxes the bundling strategy could save thousands in taxes in the selected year.
More Good News, an Increase in Charitable Contribution Limits
The charitable contribution cap has been expanded as a percentage of AGI. Prior to the ACT, charitable contributions were capped at 50% of AGI. If you had a $100,000 AGI in 2017 and donated $60,000, your write-off was limited to $50,000. The additional $10,000 would be carried forward to future tax years, possibly a lower-income year. Now taxpayers can write-off the entire $60,000 because the maximum deduction was increased to 60% of AGI.
Conclusion
All prior charitable deductions are in effect under the Act. Additionally, the AGI limitation of 50% has been increased to 60% under the Act so plenty of tax effective charitable opportunities continue.