2018 Tax reform has brought about some of the biggest changes to the tax laws since the 1980’s. With new law, often comes confusion and occasionally misinformation for taxpayers. Many taxpayers believe they will no longer be able to deduct their charitable contributions in 2018 and going forward. The standard deduction has been increased, meaning that many people with modest charitable contributions each year may not see the same benefit. However, strategies exist for the charitably inclined to realize tax benefits in 2018 and going forward.
Lumping of Charitable Contributions
The first strategy that is available to taxpayers is the lumping of multiple years of charitable contributions into one year. For example, a married couple with charitable goals of $3,000 a year and $19,500 of other itemized deductions would see no benefit from their $3,000 of charitable contributions each year. They would use the standard deduction amount of $24,000 each year.
However, if that same couple were to lump 5 years of charitable contributions into 1 year, they would claim $15,000 of charitable contributions in 2018 and realize an additional tax deduction of $10,500. Using this strategy taxpayers can also help manage their tax rate by making the contributions in the year they will have anticipated higher tax rates. Using a Donor Advised Fund to facilitate this gift, could allow taxpayers to receive the large tax deduction in one year, while distributing charitable contributions in future years.
Donation of Appreciated Property
For taxpayers that own appreciated property, there could be a tax advantages to donating the assets instead of selling them. Take for example a stock position that was acquired 20 years ago and is now worth $100,000 more than what was originally paid for it. If the stock were simply sold the taxpayer would likely paid 15% – 23.8% capital gains and net investment income tax. However, if the same stock were to be put into a Donor Advised Fund, the taxpayer could take an itemized deduction for the full fair market value of the stock, not have to pay any capital gains tax, and assets in the donor advised fund can grow tax-free.
Qualified Charitable Distributions
Another strategy available to taxpayers currently 70 ½ or over is using their qualified charitable distribution(QCD) to satisfy part or all of their required minimum distribution (RMD) from their tax-deferred retirement accounts. Rather than claiming the charitable donation as an itemized deduction, the qualified charitable donation reduces the taxpayers adjusted gross income. Taxpayers do not need to overcome the higher standard deduction, the entire amount of QCD will yield tax benefits. Not including the donation as income could prevent an increase in Social Security taxation, an increase in Medicare premiums, or a reduction in deductible medical expenses, which is based on a percentage of the taxpayers adjusted gross income.
Although the 2018 tax law may limit many taxpayers’ abilities to deduct charitable contributions they would have previously been allowed to take, strategies still exist for charitably inclined taxpayers to realize tax benefits on their donations. The strategies mentioned in this article are meant to provide a brief overview of possibilities for taxpayers. Before implementing one of these strategies we recommend asking your financial planner or tax professional if the strategy is appropriate for your given situation.
—Tim Stuart, CPA