Charitable Giving Tax Strategy

2018 Tax Cuts and Jobs Act (TCJA) - How to tweak your charitable giving

When Congress signed the sweeping new tax legislation at the end of 2017, nonprofits like America SCORES Bay Area and other beneficiaries of charitable deductions were thrown a bit of a curve ball. Now what?

First off, some good news. The deduction for charitable giving stays in place. But there’s a hitch. More to follow on that.

Diving into the specifics, the Tax Cuts and Jobs Act (TCJA) doubled the standard deduction rate to $12,000 for individuals; $24,000 for married couples filing jointly; and $18,000 for heads of households. What that means is more people will likely claim the standard deduction and fewer will itemize.

But it doesn’t have to stop there. There’s still a big incentive to itemize, and crucially, it's the only way to take advantage of the retained deduction for charitable giving.

Let’s take a look at how this might all affect you.

Let’s say you do itemize your deductions. If the total of your deductions (including your charitable deductions) is going to be right around that $10,000 limit, consider boosting your contribution to America SCORES and other nonprofits or charities you support. Why? Because if you then exceed the standard threshold ($10K), you can itemize your deductions and get the greater tax benefits for your effort. Under that cap, and you can’t reduce your income tax.

How to maximize your charitable giving strategy

Here’s another option. Consider bundling your routine charitable gifts in a given year.  That can allow you to itemize deduction for that tax year. The following year you might then take the standard deduction.

Finally, overall tax rates went down slightly for most people. That means you may have more after-tax income in your pocket when all is said and done. And that might encourage you to be a little more generous with your charitable giving this year.

Here’s some more food for thought:

People living in places with high income and property taxes - like California - are in a boat of their own. There’s a bright spot though. If you’re a Californian with both relatively high taxes and a mortgage, you're going to reach that $10,000 annual cap faster than those in places with lower taxes. Which brings us back to the incentive to itemize and to take advantage of the tax-reduction benefits of your charitable deductions.

So what are your giving strategies?

• Bundle your planned charitable gifts to get you over the $10K cap. One approach is to give twice the amount you typically give in a single year, boosting your itemized deductions over the limit and enhancing your tax advantages. The following year you would take a break and take the standard deduction.
• A Donor Advised Fund (DAF) can give you greater flexibility in your giving and offers some clear tax advantages. With a DAF (designated as a 501 ©(3)) you can make a one-time charitable contribution and receive an immediate tax break for your full donation. You then can recommend grants from the fund to your favorite nonprofits and charities over a longer time frame. Here’s the Economist’s take on DAFs and some guidance from Kiplinger’s.
• If you’re over 70 ½, and haven’t yet taken your required annual IRA minimum distribution, you can make a tax-free transfer to a nonprofit or charity. This works for both traditional and ROTH IRAs. And the limits are generous, up to $100,000 per individual. For this method, you don’t need to itemize your deductions to benefit.
• For high-income earners especially, giving a non-cash donation (stocks or appreciated assets) can be a way to get a tax advantage. The new legislation allows you to make gifts of appreciated assets (that you’ve owned for at least one year) without requiring you to pay capital gains taxes. Itemize your deductions, and you get both the tax benefit of an income tax charitable deduction (based on the full value of your assets) and lower your capital gains exposure.