The Tax Cuts and Jobs Act of 2017 is certainly a controversial piece of legislation. However, one thing we can probably all agree is the new law will change much about what we knew about taxes and how we will plan going forward. However, one unintended victim of the new law is likely to be charities.
With the standard deduction for married couples increasing from $12,000 to $24,000, far fewer people will itemize their deductions, opting to take the standard deduction. According to the IRS, 30% of filers currently itemize their deductions, but it anticipates fewer than 10% will continue to do so under the new law. This could result in filers making fewer charitable contributions, since if you’re not itemizing, you can’t take the deduction for charitable gifts. Certainly, there are more benefits to charitable donations than a tax deduction, but even while recognizing the importance of altruism it’s not a stretch to think fewer folks may open their wallets.
There are, however, a few strategies you can consider to continue enjoying both the warm feelings associated with giving and a lower tax bill. If you’re one of the folks who will continue to itemize, perhaps because you have a large mortgage interest deduction combined with state and local tax deductions, nothing must change - keep doing what you’re doing. If you’re one of those filers who will benefit from the simplified larger standard deduction, these strategies may help.
Among the easiest may be bunching your charitable donations together so when combined with other deductions, you exceed the standard deduction. Maybe this means making two years’ worth of donations in a single year and skipping the next. So you might itemize one year when you have larger deductions, then take the standard deduction the next and so on.
Another strategy for those who are over 70.5 years and required to take minimum distributions from their IRAs is what’s known as a qualified charitable distribution, or QCD. Essentially you donate your required distribution directly to a charity, rather than taking the income yourself. This way you’re not taxed on the income at all and you have satisfied your required distribution. This strategy may have the additional benefit of also reducing your income for the purposes of Medicare premiums.
A third strategy is to open a donor-advised fund. Your last name doesn’t have to be Gates or Zuckerberg to have a donor-advised fund; think of it as a charitable savings account. You would make a larger contribution to the fund, consolidating several years’ worth of donations into a single year and taking the full deduction for the year. You could distribute the proceeds to the charities of your choice over several years, and in the meantime, the assets in the donor-advised fund will grow tax-free. Keep in mind the contribution to the fund is irrevocable, so you can’t get it back.
If you’re holding onto investments that have appreciated greatly over the years, it may make sense to consider using them to fund your charitable giving. If you sell the investment, you’ll owe taxes on the gains, but your favorite charity could sell them and not owe a penny. You get a tax deduction for the full value of the investments AND avoid paying taxes on the gains. Nice, right?
This piece is meant to be a quick introduction to strategies designed to help you maximize your charitable gifting, although there are additional details to consider. If you would like to discuss your charitable intentions in greater detail to see if these or other strategies make sense for your plan, please reach out to your planner.
Howard Pressman, CFP®
Neither Voya Financial Advisors nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation
Investment advisor representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc (member SIPC)