Charitable Giving Under The New Tax Law
By Brett Gottlieb
A year ago, the Tax Cuts & Jobs Act was the talk of the town. Though it has mostly slipped from the public spotlight, now is when we are actually starting to feel its effects. Tax season is upon us, and there are changes in store for just about everyone.
One area where the new tax law is definitely changing things is in charitable giving. Many people focus on the new, higher standard deduction and fear that it will negatively affect charitable giving, but there are also provisions in the law that actually increase incentives to give. Here is a look at the effects of the new tax law and some of the options you should consider for your charitable giving.
How The Higher Standard Deduction Affects 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In addition, the new law repealed the Pease limitation.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 be able to still 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.
What if, instead, 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.
Donor Advised Funds
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 disperse 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 70 ½ 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 utilize this strategy.
Get The Most Out Of Your Giving
Now that tax season is here, we are finally going to see what the real effects of the new tax law are. 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, we at Comprehensive Advisor would love to talk to you! Give us a call at (760) 813-2125 or email info@ComprehensiveAdvisor.com. We would love to get to know you and see how we can help you make the world a better place.
About Brett and John
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees in Business Administration and Economics. Brett is Life Insurance licensed in several states.
John Mc Kean, financial advisor, joined Comprehensive Advisor in 2016. He has been in the financial services and retirement planning industry for over six years. John is Life Insurance licensed in California.
Brett and John previously worked as Registered Representatives with Securities America, one of the largest independent broker/dealers in the country, and currently offer advisory services through Legacy Road, LLC, a Registered Investment Advisor. Both are passionate about educating clients on retirement planning. They take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.
Advisory services offered through Legacy Road, LLC, a Registered Investment Advisor.
Brett Gottlieb, Investment Advisor Representative. California Insurance License #0C68886.
John Mc Kean, Investment Advisor Representative. California Insurance License #0K37445.
Comprehensive Advisor and Legacy Road, LLC are not affiliated.