The Tax Cuts and Jobs Act passed in December of 2017 marks the biggest overhaul in the tax code in many years. One area that will be impacted under tax reform is charitable giving.
While charitable contributions remain eligible as an itemized deduction under tax reform, the ability to actually deduct your contributions may have been impacted by some changes in in the rules. Here are some thoughts for this holiday season and throughout the year.
SALT stands for state and local taxes. Tax reform capped the amount of these taxes that can be used as an itemized deduction at $10,000 for 2018 going forward. The two biggest SALT components for most people are their state income taxes and their property taxes. This will especially impact those people living in states with high income taxes and locations with high property values/property taxes. Many commentators say this was politically motivated since taxpayers in “blue states” seem to be disproportionately impacted, I’ll leave that to you the reader to decide.
Higher standard deduction
The other major change that may impact your ability to itemize deductions is the increase in the standard deduction. Starting in 2018, the standard deduction increases to $24,000 for those who are married filing jointly and $12,000 for single filers. This means that if your itemized deductions are less than these thresholds, you will be better off taking the standard deduction versus itemizing.
Note that these and most provisions under tax reform expire after the 2025 tax year, so we will see what the future holds for these and other provisions beyond that.
Deductibility of charitable contributions under tax reform
The deductibility of charitable contributions was not eliminated under tax reform, in fact it was expanded for some high-income taxpayers. The issue for many taxpayers is whether or not they can still itemize deductions with the changes to the standard deduction limits and the SALT cap discussed above.
For those whose situation might not allow them to itemize, here are some ways to make your charitable giving more tax-efficient.
Let’s say that you and your spouse file a joint return. In this example let’s say your mortgage interest is $10,000 for the year and your SALT taxes are capped at the $10,000 level. With other deductible expenses your itemized deductions would come to $21,500, leaving you $3,500 short of the $24,000 standard deduction threshold.
One option would be to bunch expenses that would qualify as itemized deductions into 2018 (or any appropriate year) to get over the $24,000 hurdle.
In the case of charitable contributions, you might consider making additional contributions in the current tax year to help your reach the threshold where you can itemize. If you normally would make contributions of $1,500 per year and can afford to do so, you might try to make 2-3 years’ worth of contributions to the organizations of your choice in the current year to get your deductions above the threshold.
Give appreciated securities or assets
Using appreciated securities held in a taxable account to make charitable contributions has long been an excellent method to make charitable contributions. Stocks, mutual funds and ETFs that have appreciated in value are good gifts. Other types of appreciated assets can be used as well, such as art, collectibles and real estate. These types of assets will need to have an appraisal to determine their value as a gift, versus using the market value on the day of the gift for appreciated securities.
There are two potential benefits:
- The value of the gift can be deducted as a charitable contribution for those who can itemize deductions.
- There are no capital gains taxes that will be due on the contributed shares. If you were to sell the shares first and then contribute the cash, you would owe capital gains taxes on the amount of the realized gain on the sale.
This strategy can also be used as part of your overall portfolio rebalancing, it can be a tax-efficient way to rebalance your holdings.
Even for those who cannot itemize under the new rules, the benefit of not having to pay taxes on the capital gains can be a significant benefit.
If you have a security that has declined in value, you are generally better off selling it, realizing a loss on the sale and then contributing the cash.
If this is a route that is appropriate for you, be sure to contact the organization to ensure that they can accept gifts of appreciated securities or other types of assets.
A donor-advised fund is a fund that allows you to have your contributions to the fund professionally managed, offering the opportunity to make contributions to qualified charitable organizations over time. DAFs have been around for many years and are offered by such big-name financial services organizations like Vanguard, Schwab and Fidelity among others.
After establishing your account, contributions to the DAF can be made via check, securities or other assets. The details may vary a bit from fund to fund.
The fund invests your contributions professionally, typically through a list of individual funds or several managed portfolios they might offer. The money grows, and contributions can be made over time to the organization(s) of your choosing, as long as they are qualified charities. Most DAFs have minimum initial and future contribution levels, as well as minimum donation levels.
DAFs fit well into the new tax environment in that they can accept appreciated securities and can be a great vehicle to bunch your contributions in order to be able to itemize in certain years. They also allow you to space out your charitable donations if your desire is to give a certain amount each year.
RMD – Qualified Charitable Distribution (QCD)
For those who are age 70 ½ or older, you can direct some or all of your required minimum distribution (RMD) to a qualified charitable organization each year in what is called a qualified charitable distribution (QCD). The limit is $100,000 annually.
The QCD has been around for a number of years. The amount directed to the charity is not taxed. This is beneficial for many reasons, including keeping your income in a range that offers the lowest future Medicare costs.
The amount of the QCD does not qualify as a deductible charitable contribution. If you have charitable intentions, this can be a tax-efficient way to make charitable.
The Bottom Line
Contributing to charity is a great thing to do for those of us who are able to do it. As a Jesuit priest told me back in my graduate school days at Marquette University, you might as well take any tax breaks possible when making donations. The ideas above can help make your contributions a bit more tax-efficient.
As with any tax or financial planning issue, be sure to consult with a qualified tax or financial professional to determine if these ideas make sense for your situation.
Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.
Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.
Photo via I’dPinThat!