Thanks to the Tax Cuts and Jobs Act (TCJA) individuals and businesses alike will see a significant difference in their tax filings going forward. Beginning January 1, 2018, the standard deduction increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filing jointly (MFJ). With the increase in the standard deduction, many taxpayers will no longer itemize. As a result, planning for charitable giving is more important than ever.
2018 Eligible Itemized Deductions
First, let’s review the items that are now eligible for deductions.
- Medical expenses – Must be greater than 7.5 percent of Adjusted Gross Income (AGI) in 2018; slated to revert back to 10 percent of AGI in 2019.
- Property, state and local taxes – Can be itemized up to a combined $10,000 cap.
- Home mortgage interest payments – Existing mortgages are grandfathered under the previous rules and will remain deductible on a principal of up to $1,000,000. Interest on home mortgages taken out after December 15, 2017, can be deducted on loan principals of $750,000 or less. Interest on home equity loans is not deductible.
- Charitable contributions – Increased to 60 percent of taxpayer’s AGI.
- Casualty and theft losses – “Personal casualty losses” are deductible only if attributed to a declared national disaster.
Charitable Contribution Strategy
An estimated 21 million taxpayers will no longer receive a deduction for charitable giving, and charitable organizations fear the impact the new ruling will have on donations. Here are three options that will allow you to support the organizations you’re passionate about and reduce your tax liability at the same time!
Strategy #1: Double-up. Lump two or more years worth of charitable contributions into one tax year and forego contributions in the following year(s). Doubling up on contributions will help enhance the amount of your itemized deductions.
Here’s a look at how doubling-up ($10,000 annually versus $20,000 every other year) can make a big difference on your tax return. Let’s assume this family is MFJ and that they are eligible for the standard deduction of $24,000, plus the following itemized expenses—$10,000 for state, local and property taxes and $4,000 for mortgage interest.
In this scenario, the family will gain an additional $10,000 in itemized deductions over two years. For a couple in a 24 percent tax bracket, that’s a savings of $2,400. Savings increase to $3,700 for a couple in the 37 percent tax bracket.
Strategy #2: Use a Donor Advised Fund. Consider a donor advised fund (DAF) if you’re concerned that biennial donations will negatively impact the cash flow of the organizations you support. DAFs allow you to create a personal account to which you can contribute funds at anytime. You can also determine which charities you want to support and when to distribute funds to them. Your contribution is deductible the year you make it.
Continuing with the previous example, a couple could contribute $20,000 into their DAF in 2018, but spread the distributions to charities over the next two years (or beyond). Both Schwab and Fidelity maintain DAFs for our clients.
Strategy #3: Make Charitable Gifts from an IRA. If you are over age 70 ½ and have traditional IRA accounts, your annual required minimum distribution (RMD) can be a source of charitable giving. Rather than taking the RMD as a taxable distribution, you can direct up to $100,000 to one or more charities as a Qualified Charitable Distribution (QCD). The distribution must go directly from the trustee of your IRA (e.g. Schwab or Fidelity) to the charity. This approach also reduces your AGI since the amount of the QCD is not included as taxable income for the year. Why is this so important? The amount of your AGI impacts both Medicare premiums and taxation of Social Security benefits. One thing to note: Since you didn’t pay taxes on your IRA income, you don’t receive a charitable deduction for a QCD.
All these strategies are viable solutions but the way each will impact your tax return will vary based on your specific circumstances.