How to Maximize Charitable Donation Deductions Under the New Tax Laws
The 2017 Tax Cuts and Jobs Act has now been in full force for a few months, and it is time to start exploring alternatives to your personal tax planning. While most taxpayers will benefit from lowered federal tax rates, a significant number of people will need to take a new approach to deductions. With the combination of the federal standard deduction increasing to $12,000/$24,000 (Single/Married Filing Jointly, plus more if age 65) coupled with a large portion of itemized deductions now being disallowed, taxpayers should consider other charitable contribution strategies.
If you are 70 ½ or Older
If you normally make gifts to charities, one strategy that is worth considering is the use of Qualified Charitable Distributions (QCDs). A QCD is a direct transfer from your IRA account to a qualified charity of your choice. However, what makes these special is the fact that not only does the distribution count as part of your Required Minimum Distribution (RMD), but the total amount you donate is excluded from your taxable income. QCDs do, however, come with specific requirements (minimum age, distribution rules, etc.) which should be reviewed in detail before considering this strategy. For an example of how this strategy works, please click on the link below:
We want to highlight the key point that donations must come directly from the IRA, to the qualified charity. This can be done via check writing from the IRA account, a directly linked debit card, or by way of direct transfer. However, if the IRA distribution is made first to the IRA owner and then paid to the charity, it will still be a taxable distribution and will not qualify as a Qualified Charitable Distribution.
Donor-Advised Funds (If you are not 70 ½)
If you are not age 70 ½ yet or have no IRA accounts, an alternative way to maximize allowable charitable deductions is by using a donor-advised fund (DAF). A DAF allows for individuals to donate money, take a deduction in the current year, but then be able to spread out the actual payments to charities whenever desired. The strategy that we would like to specifically highlight is called “bunching”. This is where an individual would bunch together multiple years worth of donations into a DAF, take the deduction in the current year, but then pay out to the charities of their choice over many years. It is a win-win scenario as the individual would receive a significant tax benefit, but the charities would still receive their normal donation amounts. Another advantage of using a DAF is that appreciated assets can be used instead of gifting cash assets. For an example of how this strategy works, please click on the link below:
Federal Tax Benefit of using a “Bunching” Strategy for Donor-Advised Funds
Questions?
Both of these strategies are options for individuals to continue receiving tax breaks despite the new laws put forth by the Tax Laws and Job Act, but also require a review of your personal situation.