Last year, the Tax Cuts & Jobs Act was all anyone could talk about. Though it has mostly slipped from the public spotlight, we are just now starting to feel the effects of the new bill. Tax season is upon us, and as a result, there are changes in store for just about everyone.
One area the new tax law is affecting is charitable giving. While many people focus on the new, higher standard deduction and fear that it will have a negative impact on charitable giving, there are also provisions in the law that actually increase incentives to give. Here is an overview of how the new tax law is changing your tax filing experience and some of the options you should consider for your charitable giving.
The Higher Standard Deduction And Giving
Charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes.
In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2018, the standard deduction for a single filer had almost doubled to $12,000. That means that a taxpayer needs to have over $12,000 worth of property and state taxes, interest payments, and charitable giving in order to receive any tax benefit from their donations.
The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions.
Increased Limits On Charitable Deductions
The new law also increases incentives for giving, particularly for high-income earners. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI.
In addition, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now, high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.
Bunching Charitable Giving
How the law affects your own personal giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may still be able to benefit from giving while also taking advantage of the higher standard deduction. You can do this by bunching your giving or doing several years’ worth of giving in one year.
For example, let’s say you are a single taxpayer who usually donates $6,000 a year and you have $5,000 worth of taxes and interest payments that are deductible. If you itemize, your deductions will total $11,000, which is less than the standard deduction. As such, you would take the standard deduction and miss out on the benefits of your charitable giving.
Instead, what if you bunched your giving and only made donations every other year? In year 1 you wouldn’t donate anything, so you would take the $12,000 standard deduction. In year 2, you would give double and be able to itemize for a deduction of $17,000. If you repeat this pattern every other year, then you will get an extra $5,000 of deductions every other year that wouldn’t be available to you if you gave yearly.
One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then distribute it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.
With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years.
Giving Opportunities In Retirement
If you are older than 70½ and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it does not count as taxable income to you.
With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to take advantage of this strategy.
Get The Most Out Of Your Giving
Now that tax season is here, we will finally see the real effects of the new tax law. No matter how it affects you, it doesn’t need to deter your generosity. You can still give back and receive tax benefits for it. If you want to know more about how to get the most out of your charitable giving or have any questions about the strategies mentioned here, the team at Mason & Associates would love to talk to you! Give us a call at (323) 254-3072 or book your free 30-minute introductory phone consultation today!
About Mason & Associates, Inc.
Mason & Associates, Inc., was founded in 1989, specializing in Life Planning for individuals, families, and small businesses. Life Planning places a person’s core life values at the heart of the advice process and focuses on the human aspects of financial planning.
As a client, your personal story is key to our planning process. That is why we strive to build a close relationship that will encompass every aspect of your life. Together with our team of professionals, we guide you through the process of identifying what is important to you, your goals, your dreams. We then put into place a financial road map to set you on your way toward achieving your objectives.
Our responsibility does not end there. As you encounter bumps in the road, changes in goals, or any other roadblocks, we are there to offer advice and guidance. We are there to celebrate your successes and cope with your challenges. We work alongside your other professionals, such as your attorney and your CPA, to be sure all of your legal and financial needs are aligned.