One impact of the Tax Cuts and Jobs Act (TCJA), signed in to law at the end of 2017, was the doubling of the standard deduction. The TCJA increased the standard deduction to $24,000 for taxpayers filing jointly or for a surviving spouse, $18,000 for a head of household and $12,000 for single filers. As a result, many taxpayers who previously found it advantageous to itemize their deductions on their federal income tax returns no longer do. By one rough, unattributed estimate, 30 percent of taxpayers itemized on their 2017 income tax returns, and that figure may decrease to 8 or 9 percent for 2018!
If you and your tax professional have determined that it is no longer advantageous for you to itemize your deductions, which would include deductions for your charitable contributions, there are still ways to maximize the impact of your year-end charitable gifts.
1. Develop a plan to “bunch” your regular charitable contributions.
If you regularly make a charitable contribution to one or more specific charities every year, consider “bunching” the charitable contributions you would have otherwise made over the next two or more years into this year. Following this strategy could produce aggregate itemized deductions this year in excess of the standard deduction. This may have the effect of generating income tax savings this year that would otherwise have been unavailable had you made the same charitable contributions evenly over the next several years.
For example: Generous John and his spouse, Kind Kim, file jointly and give $12,000 to their church each and every year. After consulting with their tax advisors, John and Kim decide to bunch the contributions they would have made to the church over the next three years by making a gift of $36,000 to the church this year. As a result, and based on their specific tax profile, they produce aggregate itemized deductions in excess of their $24,000 standard deduction. Their tax preparer recommends that they itemize their deductions on this year’s return, which may result in income tax savings to the couple this year that would otherwise have been unavailable. They have also decided to notify the church of their plan to bunch contributions, so the church can plan on a single $36,000 gift this year, rather than the usual $12,000 gift each year.
2. Create a donor advised fund.
If you typically change up the charities you contribute to each year, consider “bunching” the total amount you give annually to create a donor advised fund this year. Once you fund the donor advised fund, you can take your time identifying the charities to receive those funds over the next several years. You will be able to take a charitable deduction for the total amount that you contribute to the donor advised fund this year, and decide later which organizations you want to recommend to receive those funds.
For example: Donor Diane, a single filer, usually makes $6,000 in contributions to charities each year. The charities that she chooses change from year to year based on the needs she sees in her community (and which charities come a-callin’). After consulting with her tax advisor, Diane decides to create a donor advised fund at her local community foundation. She bunches the charitable contributions she would have made over the next five years, and makes a gift to her new donor advised fund of $30,000 this year. Her accountant recommends that she itemize her deductions on this year’s return, which may result in income tax savings for Diane that she would not have received if she kept making $6,000 in gifts each year. As the advisor to her fund, Diane looks forward to selecting charitable organizations to recommend to receive grants from her fund each year.
Note: This strategy also works if you already have a donor advised fund. If you make a regular contribution to your fund each year, you may want to consider “bunching” the contributions you would have otherwise made to your donor advised fund over two or more years into this year.
3. If you are age 70 ½ or older, make a direct rollover of your IRA to charity.
A charitable giving strategy that avoids the impact of the new standard deduction on taxpayers’ use of itemized deductions is a charitable IRA rollover. An individual age 70½ or older can direct the custodian of his or her IRA to distribute up to $100,000 from the IRA directly to charities selected by the individual. This essentially creates a charitable contribution income tax deduction for the IRA owner, because assets of an IRA, if distributed to the IRA owner, constitute taxable income to him or her. By directing an IRA custodian to make gifts directly from your IRA to charities of your choice, such funds are not included the taxpayer’s taxable income. Note, pursuant to federal regulations, a charitable IRA rollover cannot be made to a donor advised fund. Also, it is important that the funds roll directly from the IRA to the charity. If the IRA owner withdraws the funds and then distributes them to the charity, the tax savings are not realized because the funds must be included in the taxpayer’s taxable income.