New Tax Strategies for Charitable Donors
The passage of the Tax Cuts and Jobs Act (TCJA) changed or eliminated some tax benefits for many taxpayers who frequently itemize deductions. However, tax-saving strategies may still be available. One solution is “bunching,” or donating twice as much in alternate tax years, to take advantage of itemizing in one year and then claiming the standard deduction in the other years. You may donate to charity primarily to support causes that are important to you, but you can still donate to enjoy the tax benefits.
Changes imposed by the TCJA
There are two ways the TCJA can impact your charitable giving. The first is that the TCJA cut tax rates for most (but not all) taxpayers, making charitable giving more expensive. For example, consider a married couple that donates $10,000 to charity each year. In 2017, they were in the 28% tax bracket, so the after-tax cost of their donations (after saving $2,800 tax) was $7,200. If the current tax bracket rate is only 24%, the rate changes the net cost of the donations to $7,600.
The cost of giving also increases if the married couple does not benefit by itemizing deductions. The second change is an increase in the standard deduction, making itemizing deductions less likely to be beneficial for many taxpayers. The TCJA nearly doubled the standard deduction, with 2020 standard allowances of $12,400 for single filers and $24,800 for couples filing jointly. In addition, it reduced many itemized deductions, including those deductions for state and local taxes, now limited to $10,000. And it eliminated many miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor. Itemizing deductions provides a tax benefit only when itemized deductions exceed the standard deduction.
Consider another example — a married couple has $7,000 in deductible mortgage interest, $10,000 in deductions for state and local taxes, and no other itemized deductions besides charitable donations. The $24,800 standard deduction means they will not get a tax benefit on their first $7,800 in charitable donations until the itemized deductions exceed $24,800.
Alternative methods of tax benefits
As mentioned earlier, the timing of charitable giving by “bunching” donations into alternating years can help. For example, assume that the couple annually donates $6,000 per year to charity. They can enjoy tax savings by donating $12,000 every other year keeping the same donations. They might make no donations this year and claim the standard deduction ($24,800) when they file their 2020 income tax return and then donate $12,000 next year and claim $29,000 in total itemized deductions on their 2021 return ($10,000 in state and local taxes, $7,000 in mortgage interest and $12,000 in charitable donations). This adds $4,000+ deductions over two years.
If you bunch donations and itemize (or itemize because you have enough individual deductions), keep in mind the TCJA increased the limit for cash gifts to public charities and certain private foundations from 50% to 60% of income — generally, your AGI. Other types of contributions continue to be limited to 50%, 30% or 20% of AGI, depending on the kind of property donated and the type of organization. Excess contributions may be carried forward up to five years.
Some elderly taxpayers will find it difficult to reach the standard deduction with itemized deductions. There is another method which benefits them if they are taking Required Minimum Distributions (RMDs) from retirement accounts. The RMD is a required taxable distribution over their remaining life expectancy. Many are eligible to designate part of the distribution as a Qualified Charitable Distribution (QCD).
The QCD is limited to $100,000 per person per year. If you want to do a QCD, you must make a direct IRA transfer of funds from the IRA to the charity. You should instruct the IRA custodian to make the distribution check payable to the charity and confirm that it is being allocated from your annual RMD.
Because the TCJA also doubled the gift and estate tax exemption (for deaths and gifts after December 31, 2017, and before January 1, 2026), most taxpayers no longer need to consider charitable giving as a strategy for reducing these taxes. Nevertheless, if you plan to leave a charitable legacy, you may want to include charitable giving in your estate plan.
Make charitable donations tax-efficient
As you continue to support charities, make sure your charitable giving is as tax-efficient as possible. Consult your ORBA tax advisor about your specific tax situation and all available strategies that benefit you.
For more information contact Thomas Kosinski at firstname.lastname@example.org or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.