Co-authored by Marshall Lund, CFP®, Financial Advisor at Wipfli Financial Advisors
The following article was prepared in collaboration with our affiliate, Wipfli LLP. With more than 2,000 associates across the United States and in India, Wipfli ranks among the top accounting and business consulting firms in the nation.
Do you regularly donate to charity? Have you been able to deduct your charitable contributions on your past tax returns?
What about donations made with cash, stock or other assets? Are you concerned that you may no longer receive a tax benefit for your charitable contributions due to changes brought by the new tax law?
If questions like these worry you, just take a deep breath and read further — charitable contributions still remain a tax-efficient and rewarding method of giving back for many taxpayers, so long as they’re implemented effectively. Now that the dust has settled (mostly) from the passage of the new tax law (also known as the Tax Cuts and Jobs Act of 2017), we’ve done the homework for you and laid out some of the key implications affecting taxpayers, as they pertain to charitable giving, and what actions you can take to make the most of your efforts.
What Has Not Changed?
While there were several rumors in 2017 about eliminating the charitable deduction, changing the deduction to a credit or allowing the deduction for all taxpayers regardless of whether they itemize, these changes did not happen. Instead, as in prior years, taxpayers will need to itemize their deductions in order to receive a benefit for their charitable contributions. In addition, the ability to make tax-free distributions directly from an individual retirement account (IRA) to a charitable organization (subject to age, IRA type and dollar limitations) is still an available benefit.
What Has Changed?
The most significant change expected to impact charitable giving is indirect: The new tax law increased the standard deduction to $24,000 for those filing a joint return and $12,000 for those filing as single. Less taxpayers will itemize their deductions, which is where charitable contributions are listed, and as a result, less taxpayers will receive a tax benefit for their contributions.
For example, let’s say that in 2018, a married couple pays mortgage interest of $8,000 and $10,000 in real estate taxes. In addition, the couple wants to make a charitable contribution of $5,000 in December 2018. In this scenario, the couple’s itemized deductions would total $23,000 in 2018. The couple would not receive a tax benefit from their charitable contribution, since their itemized deductions would not exceed their standard deduction of $24,000.
Another change in the law applies to a much smaller fraction of taxpayers. The new law increases the adjusted gross income (AGI) limitation on cash contributions from 50% to 60%, effective for contributions made in tax years beginning after 2017 and before 2026.
Strategies to Maximize Charitable Giving
Here are four things you can do to make the most of your charitable giving efforts this year:
1. Accelerate or Defer Charitable Contributions
This strategy can benefit taxpayers who make regular, annual charitable contributions but no longer anticipate itemizing in 2018 and in future years due to the increased standard deduction.
Let’s look at this through the lens of the same couple we described above. Remember, the couple typically donates $5,000 to charity in December; now, let’s say the couple decides to adopt an every-other-year gifting strategy. The couple decides to delay their December 2018 contribution until January 2019. Then, the couple makes their normal December contribution in 2019. By deferring their 2018 contribution and doubling up their charitable contributions in 2019, they will be able to deduct $4,000 of charitable contributions in 2019, when they would otherwise receive zero tax benefit.
2. Use a Donor-Advised Fund
With a donor-advised fund, you can make a monetary contribution designated for charity today, but you can decide which charities will receive the funds at a later date. All the while, the funds will grow tax-free until they are disbursed to charitable organizations in the form of grants.
Taxpayers are allowed to deduct their entire contribution in the year they contributed to the donor-advised fund, regardless of when the funds are distributed to a charity. Taxpayers who no longer itemize deductions, are charitably inclined and need additional time to choose a charity to support may want to consider a donor-advised fund.
3. Donate IRA Required Minimum Distributions (RMDs)
Gifting directly from an IRA to a charity — otherwise known as a qualified charitable distribution (QCD) — is a tax-saving strategy that allows taxpayers to transfer up to $100,000 per year from their IRA directly to a qualified charity. Any amount processed as a QCD counts toward the RMD requirement and reduces the taxable amount of the IRA distribution. This approach will lower both your AGI and taxable income, resulting in lower overall tax liability. Taxpayers who do not expect to itemize in 2018 and need to make an RMD in 2018 would be prime candidates for this strategy.
4. Donate Appreciated Stock
Instead of making a traditional cash contribution, taxpayers may want to consider donating long-term stock positions (or stock they have held for over a year). Not only will you avoid capital gains tax, but you also will benefit from a deduction equal to the fair market value of the stock (if you itemize). Be aware that if you donate stock you’ve held less than a year, the deduction will be limited to cost basis. If a stock has lost value, it’s always better to sell it, capture a capital loss and donate the cash. Finally, it’s important to touch base with both your charity of choice and the brokerage firm you’re working with regarding procedure and timing, especially if it’s close to year-end.
While less taxpayers will be able to deduct their charitable contributions due to changes in the tax law, there are still plenty of tax planning strategies available to those who hope to maximize their tax benefit. Whether you need assistance with a multi-year tax projection, want to set up a donor-advised fund or simply discuss your charitable giving goals, be sure to reach out to your financial advisor and tax teams in order to come up with a plan that fits your unique circumstances.
If you’re interested in a general overview of the tax law changes, be sure to read, “What Should You Know (and Do) About the New Tax Law.”