Charitable Giving Under The New Tax Law
By Harlan Storey
It’s hard to believe the year is already coming to a close. The excitement of the holidays and end-of-the-year planning often lead us to think ahead to what the next year will bring. I’m sure you’ve come to realize that it’s never too early to start preparing for tax season. And now that the Tax Cuts & Jobs Act of 2017 has been in effect for a while, I want to refresh your memory about the changes it has brought for just about everyone, the effects of which we’re now feeling.
One area in which the new tax law definitely changed things was in charitable giving. Many people focus on the new, higher standard deduction and fear that it will negatively affect charitable giving, but there are also provisions in the law that actually increase incentives to give. Here is a look at the effects of the new tax law and some of the options you should consider for your charitable giving.
How The Higher Standard Deduction Affects Giving
Charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes.
In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2019, the standard deduction for a single filer was almost double that at $12,200. That means that a taxpayer needs to have over $12,200 worth of property and state taxes, interest payments, and charitable giving in order to receive any tax benefit from their donations.
The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions.
Increased Limits On Charitable Deductions
The new law also increases incentives for giving, particularly for high-income earners. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI.
In addition, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.
Bunching Charitable Giving
How the law affects your own personal giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may be able to still benefit from giving while also taking advantage of the higher standard deduction. You can do this by bunching your giving or doing several years’ worth of giving in one year. (1)
One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then disperse it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.
With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years.
Giving Opportunities In Retirement
If you are older than 70½ and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it does not count as taxable income to you.
With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to utilize this strategy.
Get The Most Out Of Your Giving
No matter how this new law affects you, it doesn’t need to deter your generosity. You can still give back and receive tax benefits for it. This is great news, especially as we enter the holiday season! If you want to know more about how to get the most out of your charitable giving, have any questions about the strategies mentioned here, or want to find out how we can help you make the world a better place, get in touch with us at Storey & Associates. Reach out today by calling 330-526-8944, emailing firstname.lastname@example.org, or you can quickly and easily click here to schedule your free initial consultation online.
Harlan Storey is president and founder of Storey & Associates with more than 30 years of experience providing financial counsel to individuals, families, and small businesses. With a background as an estate planning attorney also providing tax services, Harlan now advises a clientele consisting of corporate executives, medical professionals, small business owners, and retirees. He specializes in income tax planning, business exit strategies, estate and insurance planning, asset allocation, and career transitions. In addition to his role as a financial advisor, Harlan is a member of the firm’s investment committee and manages the operations of the business. Harlan is a CERTIFIED FINANCIAL PLANNER (CFP®), member of the Financial Planning Association (FPA), and graduated from the University of Akron with degrees in accounting and law. Harlan was one of the earliest members of the National Association of Personal Financial Advisors (NAPFA), showing his commitment to fee-only financial planning. Harlan and his wife reside in North Canton, Ohio, and are the parents of two adult children. He enjoys spending time outdoors, running, kayaking, and tending to their two horses. Learn more about Harlan by connecting with him on LinkedIn.