The Tax Cuts and Jobs Act became law in December 2017 and has changed the way taxpayers approach their year-end giving strategies. One aspect that has shifted is the standard deduction. With the increase in the standard deduction, which is now $12,000 for individuals and $24,000 for married couples, most taxpayers won’t have the necessary deductions needed to itemize.
Some well known itemized deductions have also been limited or eliminated, including the deductions for mortgage interest and state and local income tax (SALT). These deductions have been capped at a combined total limit of $10,000 and limit the amount of itemized deductions people might be able to take overall.
There are two primary ways to make the most of your deductions through your charitable contributions. While tax strategies can be an incentive, most people give because they are driven to help others—the following strategies are just two ways in which you can do good while also maximizing your deductions.
The “bunching” strategy helps taxpayers exceed the standard deduction threshold with charitable giving. Charitable giving remains unaffected by the shift in deductions. People can still give up to 60 percent of their adjusted gross income and still receive a deduction. With “bunching” taxpayers save the charitable deductions they would have made over several years and then group them together to exceed the standard deduction amount in a single year.
For example, if you normally have $10,000 in charitable deductions in one year, you would instead give $20,000 in one year. That giving would be combined with any other itemized deductions to exceed the $24,000 standard deduction (for married couples) that year. The following year, you would take the standard deduction. With “bunching” you load up for one year, and then take the standard deduction in the following year or few years. A New York Times article estimates this strategy can reduce taxes by $700 a year over a four-year period.
Donor-Advised Fund Strategy
If you would prefer to give throughout the year and maintain your giving habits while also maximizing deductions, a donor-advised fund is a good option. A donor-advised fund is a charitable investment vehicle that allows you to make contributions and receive an immediate tax deduction, while directing grants from the funds annually over time. This allows taxpayers to take the tax deduction while still spreading out their charitable giving over the current year and the following year. This flexibility is a valuable aspect of the donor-advised fund.
A donor-advised fund not only allows gifts of cash through a check or wire transfer, but also offers a significant tax advantage for gifts of non-cash assets. By contributing long-term appreciated assets such as bonds, stocks or real estate, you can avoid the 20 percent capital gains tax and 3.8 percent Medicare surcharge that would have followed the sale of these assets. By avoiding these taxes, donors can give 23.8 percent more through the fund to their charities of choice, while also receiving a charitable deduction for the full market value of the donated assets.
While receiving a tax deduction is most likely not your primary motivation for making a charitable gift, using a tax-conscious strategy is always a smart move. These strategies allow you to:
Have more discretionary income to help more organizations that are important to you.
Qualify for a tax deduction when you make your donation to a donor-advised fund by the end of the year.
Recommend which organizations receive grants from a donor-advised fund.
Linde Carroll, CFP® is an investment consultant at the Vancouver-based investment management and financial planning firm Sustainable Wealth Management. She can be reached at firstname.lastname@example.org.