The Tax Cuts and Jobs Act of 2017 made major changes to the tax code. Many people will not be itemizing, so charitable giving requires more planning to be tax efficient. Some questions that we hear this year include:
- How can we support the causes that are important to us and still get a tax deduction?
- I’ve heard I can make donations from my IRA. Is this a good option for me?
- Should I open a donor-advised fund? How should I fund it?
What options are right for you?
The standard deduction was doubled in 2018, and will continue to increase with inflation. The 2019 deduction is $12,200 per person, plus an additional $1,300 if you are over 65 or blind. The deduction for state and local taxes (known as the SALT deduction) has been limited to $10,000. You will not be itemizing unless you have enough deductions like mortgage interest and charitable contributions to get over the hurdle of the higher standard deduction. So, if you don’t itemize you won’t get any tax benefit from your charitable contributions. We’ve outlined a few charitable donation tax strategies below.
Bunching
One solution is bunching, where you group your deductions into a single year to overcome the standard deduction threshold. In the year you want to itemize, you make several years’ worth of charitable contributions, either through a large amount given directly to charities in one year (with no gifts in subsequent years
See Full Example
Let’s look at a given tax scenario.
| Taxes | 2019 | 2020 | 2021 | 2022 |
| State Income Tax | $8,000 | $8,000 | $8,000 | $8,000 |
| Property Tax | $10,000 | $10,000 | $10,000 | $10,000 |
| Total State and Local Tax Deductions (SALT) | $18,000 | $18,000 | $18,000 | $18,000 |
With bunching, our deductions are grouped in staggered years.
| Deductions | 2019 | 2020 | 2021 | 2022 |
| Adjustment for $10,000 SALT Limitation on Deductions | $10,000 | $10,000 | $10,000 | $10,000 |
| Mortgage Interest | $6,000 | $6,000 | $6,000 | $6,000 |
| Charitable Gifts | $15,000 | —- | $15,000 | —- |
| Total Itemized Deductions (adjusted) | $31,000 | $16,000 | $31,000 | $16,000 |
We take the higher itemized deduction in alternating years.
| Final Deduction Analysis | 2019 | 2020 | 2021 | 2022 |
| Standard Deduction | $24,000 | $24,000 | $24,000 | $24,000 |
| Take the Greater of Itemized Deduction or Standard Deduction | $31,000 | $24,000 | $31,000 | $24,000 |
| Total Deductions: | $110,000 (2 yrs x $24,000 + 2 yrs $31,000) | |||
Without Bunching
Without bunching, charitable gifts are the same for all four years.
| Deductions | 2019 | 2020 | 2021 | 2022 |
| Adjustment for $10,000 SALT Limitation on Deductions | $10,000 | $10,000 | $10,000 | $10,000 |
| Mortgage Interest | $6,000 | $6,000 | $6,000 | $6,000 |
| Charitable Gifts | $7,500 | $7,500 | $7,500 | $7,500 |
| Total Itemized Deductions (adjusted) | $23,500 | $23,500 | $23,500 | $23,500 |
We take the standard deduction since it is higher than the itemized.
| Final Deduction Analysis | 2019 | 2020 | 2021 | 2022 |
| Standard Deduction | $24,000 | $24,000 | $24,000 | $24,000 |
| Take the Greater of Itemized Deduction or Standard Deduction | $24,000 | $24,000 | $24,000 | $24,000 |
| Total Deductions: | $96,000 (4 years x $24,000) | |||
Without bunching we see no taxable benefit for charitable gifts!
Our final tax analysis shows a clear choice.
| Four Years Summary | |
| Total gifts to charity in both scenarios: without bunching and with | $30,000 |
| Difference between allowable deductions not bunching and bunching | $14,000 |
| Total tax savings by bunching charitable donations* | $5,600 |
| *assumed combined 40% state and federal tax | |
Now, this is a tax savings worth considering.
Donor Advised Fund
A DAF is a charitable account funded with an irrevocable gift of cash, stocks, or other assets. You can receive a charitable deduction for the full amount in the year of the gift. The fund grows tax-free and can be used in subsequent years to make donations to qualified charities. Because you got the tax deduction at the time of the original gift, there is no deduction when you make distributions from the DAF.
Qualified Charitable Distributions
A QCD, or Qualified Charitable Distribution, is a direct transfer from an IRA to a qualified charity. The distribution can satisfy your Required Minimum Distribution, with a maximum annual limit of $100,000 per person. The advantage of this strategy is the distribution is not included in your income, so your income is lower for Medicare premiums and other phase-out levels. Since the distribution is not included in your income, you do not receive a deduction, which make an ideal option if you are not itemizing. You must be over 70 ½ to take advantage of this strategy, and the QCD can only be done from IRAs, not 401(k) accounts.
I am passionate about helping people understand their financial situation so they can make decisions to meet their dreams and goals before and during retirement.
Give me a call to discuss whether any of these techniques could be right for you.
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