Did you know that even though the new tax law greatly increased the standard deduction amount, planning for your itemized deductions remains important. Read on to learn more about how you can strategize your charitable giving to maximize your tax benefits.
With the changes to the tax law in 2018 almost doubling the standard deduction from $6,350 for single taxpayers and $12,700 for married couples filing jointly to $12,000 for those who are single and $24,000 for joint filers, fewer people will benefit from itemized deductions which include contributions to qualified charitable organizations. However, we list below a few options for you to consider in order to still benefit from making charitable contributions.
Those who are close to the threshold of being able to utilize itemized deductions may be able to get a tax break by implementing a strategy called bunching. To implement this strategy, a taxpayer will donate several years’ worth of donations in a target year. This allows the taxpayer to itemize their deductions and take advantage of all other possible deductible expenses. For example, if a married couple is planning to donate $5,000 each year for the next five years, instead of giving $5,000 annually over the five-year period, they could donate $25,000 in one year, allowing them to take the tax benefit for the contributions and other itemized deductions in one year since they are now above the $24,000 standard deduction threshold. This may also provide taxpayers a greater benefit by choosing a year for these deductions in which they have higher income.
Another strategy is to set up a donor-advised fund through your local community foundation or a financial services firm. This permits a taxpayer the same “bunching” of donations indicated above but allows them to retain control over when those donations reach the charitable organizations. This gives a taxpayer the ability to take the full deduction in the year they contribute the money into the donor-advised fund and have control of how they want to distribute the charitable funds. In addition, while the money is in the donor-advised fund, it can be invested and will grow tax-free.
A third option is to form a private foundation. This allows the taxpayer to control the distributions, be able to make investment decisions, and manage operations of the organization. A private foundation can allow you to “prefund” several years’ worth of donations and distribute them over time. These private foundations have a minimum annual distribution requirement that must be tracked closely to avoid excise tax penalties. Due to the complexities of this option, please contact us for more information regarding whether it might be the best option for you.
A fourth strategy for taking advantage of charitable contributions comes from a direct transfer of minimum IRA distributions. If someone is 70 ½ years of age or older and is required to take distributions from their IRA account, they should consider transferring funds from their IRA account directly to qualified charitable organizations to avoid tax on IRA distributions. While the taxpayer will not get an itemized deduction for the contribution, they will still receive a benefit as the amount transferred (up to $100,000) will be excluded from taxable income.
Even though the new tax law might have taken away some ability to deduct charitable giving, it increases the charitable deduction threshold in curtain circumstances from 50% of AGI to 60%, which is good news for people who are already taking itemizing deductions and have significant charitable contributions.
Please feel free to contact your L&B professional at 858-558-9200 to further discuss these details.