With the new tax law comes lower taxes for some but it also changes the way you need to approach charitable giving if you want to take full advantage of the tax benefits. Now that the standard deduction has increased, many households will no longer be able to deduct their charitable contributions. However there are still two strategies that may allow you to take advantage of the tax treatment of charitable giving.
The first strategy is to “double up” and increase your itemized deductions in a single year in order to get above the standard deduction. For example: If you normally give $10,000 to charity a year then you would give $20,000 in December of 2018 which would count towards your 2018 and 2019 contributions. Then repeat this process every 2 years.
An example for a couple who files married filing joint and is in the 22% tax bracket could look like this. Using the giving example above, let’s say their itemized deductions for the year are: $5,000 property tax, $2,000 sales tax, $7,000 mortgage interest and $20,000 charitable gift. This gives them $34,000 of itemized deductions, where as if they didn’t do the double up strategy their standard deduction and itemized deduction would be the same at $24,000. They get to deduct an additional $10,000 of income, saving them $2,200 in taxes. This scenario is very simple in order to demonstrate the strategy and it will have varying degrees of success depending on your situation, but it shows that just by changing your approach to gifting you can save on taxes.
The second strategy is appropriate for people who are over 70½ and have an account that requires you to take a Required Minimum Distribution (RMD). Many of our retired clients no longer have mortgage interest to deduct, so they don’t meet the threshold to itemize deductions. This can eliminate their ability to deduct charitable contributions. A roundabout way to still be able to deduct the charitable contribution is to use your RMD as the source. This can be done by distributing the money directly from your IRA to the charity. As always, there are certain limits, and it may not apply to everyone, but it can allow you to exclude the gifted IRA distribution from your adjusted gross income (AGI). So, in an indirect way you get to deduct your charitable contribution from your RMD. This strategy can also serve two other benefits by reducing your AGI – 1) it can keep you under the Medicare surcharge limits for your premiums, and 2) possibly reduce the amount of your social security benefits that are taxable.
Both of these strategies deal with taxes, which is a complex topic, so make sure you talk to your advisor before implementing them.