Charitable Giving

You have the power to make a difference. Support the causes that are important to you.

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 has doubled to $12,000 per person (plus another $1,300 if you are over 65), and the deduction for state and local taxes 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), or by using a Donor-Advised Fund (see below). You then take the standard deduction for the following year or two.

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. 

Tracy Burgett

Financial Planner

Our Fiduciary Promise

We promise to put your interests ahead of our own and to provide transparent and straight forward fee-only services. We are an independent firm with no affiliation to a broker or parent company, so we don’t sell investment products, insurance, or annuities. 

Personalized Investments

Build the portfolio that is
comfortable and right for you and your family. Determine your unique profile.

Custom Financial Planning

Design a plan to define your goals and re-frame the possibilities. Give us a chance to lead you beyond your dreams.

Wealth Management

Get the best advice and options at each financial milestone in your life. Build a legacy of good financial decisions and sound investment management.

We would love to learn more about you.

Knowledgeable and expert.

 

 

Login

[ultimatemember form_id=”1899″]

×