TAX DEDUCTIONS AND CHARITABLE IMPACT
The Tax Cuts and Jobs Act enacted in late 2017 is more than 500 pages long with detailed changes affecting many areas of the tax code. Aside from the reduction in federal tax rates, most taxpayers will be impacted by the higher standard deduction and changes in itemizing deductions. Here’s an overview of the most impactful changes along with a few charitable planning opportunities:
Change in Standard Deduction
The standard deduction is the dollar amount that reduces the amount of income on which you are taxed and is based on filing status. Below is a summary of the changes:
- Single: From $6,350 in 2017 to $12,000 in 2018
- Married: From $12,700 in 2017 to $24,000 in 2018
If you're 65 or older, then you can add $1,600 to your standard deduction if you're single or $1,300 if you're married. The 2017 “personal exemption” deduction at $4,050 per family member was also eliminated. For families with children, the loss of the personal exemption will be offset with new child tax credit rules.
Itemized Deductions
With the change in tax law, millions of “itemized” taxpayers will likely convert to using the standard deduction. Some changes to a few common itemized deductions include:
- State, local, and property taxes: Previously deductible, but now capped at a limit of $10,000 regardless of tax filing status.
- Mortgage interest: Previously deductible up to $1M, now limited to $750,000. (Eliminated the interest deduction on up to $100,000 home equity line of credit.)
- Miscellaneous expenses: Previously deductible in excess of 2% of adjusted gross income (AGI) is now eliminated.
Plan Your Charitable Gifts
Although the deduction limit on charitable gifts of cash has been increased from 50% of AGI to 60% of AGI, individuals who switch to the standard deduction may no longer receive a tax benefit for charitable contributions – unless you plan.
“Bundle” Gifts with a Donor-Advised Fund
A potential planning opportunity is to “bundle” your charitable giving into a single year with the use of a donor-advised fund. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth. You can recommend grants to any IRS-qualified public charity. Donor-advised funds are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity. Here’s how a donor-advised fund works:
- Make a tax-deductible donation: Donate cash, stocks, or non-publicly traded assets such as real estate and private interests.
- Support your charity, now or over time: You can support any IRS qualified public charity with money in your fund.
- Grow your donation tax free: While deciding which charities to support over time, your account has the opportunity to grow based on your personal investment selections, making even more money available for charitable gifts.
Charitable Giving for IRA Owner’s Over 70.5
If you’re over age 70 1/2 and are looking to reduce your taxes while making charitable contributions, you should consider taking advantage of a Qualified Charitable Donation (QCD) from your Individual Retirement Account (IRA). The IRS ruled that charitable donations after age 70 1/2 made directly from IRA accounts will be exempt from taxation up to $100,000 as long as the distribution comes from the qualified account and goes directly to a qualified charity. This is good news for IRA owners who would like to be generous with their funds, while at the same time lowering their overall estate and avoiding taxation on their IRA distribution. If you have grown accustomed to itemizing your taxes in the past (especially your charitable donations) you may now be in for a surprise. It is quite possible that under the new tax rules you may not have itemized deductions greater than the standard deduction, and your charitable donations, in effect, may become non-deductible.
QCD Details
The QCD provides a solution to the deductibility issue! Instead of making your charitable donation with cash, as stated above, make the donation payable to your charity of choice via a QCD as part, or all of, your IRA’s Required Minimum Distribution (RMD). You won’t receive a deduction, but instead, your charitable donation from the IRA will not be included in your taxable income. You’ve been able to do this in the past, but with the new tax laws, this technique has come into the spotlight because of its effectiveness and ease of use. In order for the QCD to qualify, it is essential that the donation from your IRA be payable directly to the charity(s). Additionally, you can’t donate more than $100,000 in aggregate to your charities in a single year. Make sure your charity receives the check, and that you receive a donation receipt letter from the charitable organization. When you receive your 1099-R around tax time, attach your donation receipt letter to it so your accountant is aware you did a QCD.
Sound easy? It is!
And the benefits are huge for those now using the standard deduction. Let’s look at an example ~ A couple over age 70 1/2 is taxed at 25%. They don’t have enough in itemized deductions to exceed the new $24,000 ($26,600 if both are over 65) standard deduction. Going forward they should now make their charitable contributions from their IRA RMD’s. If they use a QCD to donate $5,000 to charity, they will save $1,250 off their tax bill! The QCD has already become very popular over the past few years, and with the new tax rules and standard deduction, it will only become more widely used. As a wealth management strategy, these QCD’s can play a significant role in your tax, estate and charitable planning moving forward. Depending on your situation and charitable appetite, they can effectively enable you to leave a legacy for your family and for the charities that are meaningful to you. What a wonderful way to make an impact beyond your lifetime.