The 2017 Tax Reform Act provided opportunities for individuals and couples who do a little planning to continue to make the most of their charitable giving and save a few tax dollars as well.
One of the biggest changes was that the Tax Reform Act eliminated personal exemptions for individual taxpayers and most deductions in exchange for nearly doubling the standard deduction. The 2018 standard deduction is $12,000 for individuals and $24,000 for married couples. Taxpayers who are 65 or older have an extra $1300 of standard deduction. Charitable contributions are still deductible, but most middle-income taxpayers will be better off using the standard deduction.
Almost all couples will have state tax and local property tax deductions which are capped at $10,000. For couples who have paid off their mortgage, they will have only one other deduction– that is, the charitable deduction. So, since the standard deduction is $24,000 or $26,600 if a couple is over 65, the question for those couples is whether their annual charitable contributions exceed $14,000 ,or if applicable, $16,600. If a couple’s expected annual charitable contributions are less than these numbers, they may be able to save a few tax dollars with some tax planning.
The first idea calls for the couple to “double up” or “bunch” their contributions into a single tax year. For example, if a couple’s total itemized deductions are $20,000, (consisting of $10,000 of state and property tax and $10,000 of charitable deductions), instead of making their charitable contributions during 2019, they can accelerate their 2019 contributions into December of 2018. Alternatively, they may choose to delay their contributions from 2018 into 2019. If the couple accelerates their 2019 contributions into 2018, their doubled up $20,000 of charitable contributions will cause their total itemized contributions, including the $10,000 of state and local property tax deduction, to exceed the $24,000 standard deduction. The $6000 of “excess” itemized deductions over the standard deduction results in tax savings for 2018. In 2019, they take the $24,000 standard deduction, which is a lot more than their $10,000 state and local tax deduction number.
A taxpayer can also “bunch” two or more years of contributions into a single tax year by starting a Donor Advised Fund (“DAF”). Some DAFs allow the taxpayer to take a charitable tax deduction now for his or her contribution to the DAF and have flexible rules which allow the donor to make grant requests for distributions from the DAF in future years to his or her favorite charities.
To illustrate the DAF idea, let’s go back to the example of the couple who have $20,000 of itemized deductions, consisting of $10,000 of state and property tax and $10,000 of charitable deductions, which means that the $24,000 standard deduction appears to be their best option. If the couple can come up with the cash and deposit $20,000 or more in 2018 in a DAF, they will have itemized deductions of $30,000 for 2018 or perhaps even $40,000, assuming they can come up with the cash. In future years (2019, 2020…) they can make charitable grant requests for distributions from their DAF until it is gone and they take the standard deduction in those years. DAFs can be established at any of several local community foundations.
A different opportunity takes advantage of the IRA Charitable Rollover law, which is available for taxpayers who have attained the age of 70½. Anyone in that age group with an IRA knows that they must draw annual Required Minimum Distributions (RMD) from the IRA, which increases the taxpayer’s income tax. The IRA Charitable Rollover law allows the taxpayer to satisfy her RMD by arranging with her IRA custodian to make a direct transfer of the RMD to any of multiple charities, which allows the taxpayer to legally avoid the extra income tax. Since the IRA Charitable Rollover avoids the recognition of income, rather than giving rise to a charitable deduction, the taxpayer can take advantage of the substantially larger standard deduction.
With some advance planning, a taxpayer can use his of her IRA Required Minimum Distribution to fund all or part of the charitable contributions which he or she would have made anyway, take the standard deduction, and possibly save thousands in income taxes.