Trade Secrets: New Tax Law Changes Impact Charitable Donations
When you review your 2018 tax return (hopefully anticipating a refund), you may notice a few things that are different. The biggest changes involve charitable donations.
The 2017 Tax Cuts and Jobs Act (TCJA) placed new limits on standard and itemized deductions, which created new hurdles when planning deductions with tax advantages in mind, according to Eric Raether, founder of and a wealth advisor at Canopy Wealth Management in Middleton.
“Prior to 2018, most taxpayers who owned a home and carried a mortgage itemized their deductions, which meant that charitable donations were also deductible on Schedule A,” Raether says. “However, the TCJA increased the standard deduction to $24,000 for most married taxpayers in 2018 and placed a cap on the combined deduction for state and local taxes of $10,000. This has the effect of significantly reducing the number of taxpayers who itemize, as most will take the higher standard deduction.”
Some estimates show that only about 10 percent of taxpayers will itemize, compared to about 30 percent before the change, according to Raether.
As a result, many taxpayers no longer will receive a deduction for charitable contributions — which may not bother some philanthropists. “People tend to give to charity because doing so is important to them,” Raether says. “The tax benefits are secondary.”
That said, Raether offers the following four strategies to leverage your charitable donations for tax purposes.
1. Bunch donations.
Say you have $20,000 of deductions before charitable donations, and you donate $4,000 per year to charity. In 2019, the standard deduction for married couples filing jointly is $24,400, which means there is no tax benefit to your donations. Instead, consider bunching your donations: donate $8,000 every 2 years, allowing you to itemize, and then take the standard deduction in alternate years when you make no donations.
2. Establish a Donor-Advised Fund (DAF).
A DAF allows a donor to make a tax-deductible contribution to a fund, and then advise on grants from the fund in future years. In essence, this allows you to bunch several years of donations into a single donation — and receive a larger deduction in the year of the contribution. Funds can be invested within the DAF to grow over time.
3. Donate appreciated securities.
To the extent that you hold securities that have appreciated in value, it can be advantageous to donate shares of the securities in lieu of cash. Your deduction is based on market value of the securities donated, and you avoid paying capital gains tax on the gain. As a tax-exempt organization, the charity can sell the security without recognizing a taxable gain. If you want to keep that security in your portfolio, simply buy it back with the cash you would have donated. While many charities have brokerage accounts to accept securities, you will need to check with your charity to make sure.
4. Qualified Charitable Distribution (QCD) from IRA.
If you are over age 70-1⁄2, and have funds in a traditional IRA, you may benefit from a QCD. This allows you to distribute funds directly from your IRA to a qualified charity. While the contribution does not show up as an itemized deduction on Schedule A, the distribution is not taxable. Effectively, this creates what accountants call an “above the line” deduction. The amount counts toward your required minimum distribution, but it is specifically excluded from taxable income. This allows you to reduce your taxable income and still take the full standard deduction.
Raether recommends developing a new strategy for charitable giving now, if you haven’t already done so. “You should re-evaluate what you are doing philanthropically before we get too far into 2019,” he says.
Eric Raether, CFP
Founder & Wealth Advisor
Canopy Wealth Management
This is not intended as a guide for the preparation of tax returns or to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. The information contained herein is general in nature and is not intended to be, and should not be construed as legal, accounting, or tax advice or opinion.