Charitable Giving and the New Tax Laws: What You Need to Know

While people give to charity primarily to fulfill their vision of a better world, what they give and how and when they give is often motivated, in part, by tax considerations.

That’s why many nonprofit organizations were concerned when the Tax Cuts and Jobs Act of 2017 (TCJA) went into effect this year. They feared that its lower tax brackets and higher standard deductions ($12,000 for individuals and $24,000 for married couples) would reduce many taxpayers’ financial motivations for making substantial gifts.

While these concerns may be true in some situations, in other cases the new laws actually create incentives for some donors to increase their annual contributions.

Accelerating donations to preserve itemized deductions

TCJA’s annual $10,000 limit per return on state and local tax deductions (including sales and property taxes) will push many taxpayers’ deductible expenses below the $12,000/$24,000 standard deduction threshold.

If you’re in this situation and want to itemize deductions, you’ll have to increase deductible expenses. One way you can do this is by making several years’ worth of aggregated charitable donations in a single tax year.

For example, if you and your spouse have $23,000 in deductible expenses this year, including $10,000 in charitable donations you make annually, you might choose to bundle two years’ worth of contributions, or $20,000, into one donation in 2018. This would raise your deductible expenses to $33,000, which would allow you to itemize them.   

If you don’t want to make an accelerated contribution to a specific charity or charities, you can instead donate the money to a charitable giving vehicle such as a donor-advised fund. You can park the money in the fund and keep it invested until you’re ready to distribute it to one or more qualified charities on a timetable of your choice.

Increased donation limits

Another benefit for those who can itemize deductions: TCJA raises the deductible limits of cash donations from 50% of Adjusted Gross Income to 60%. You can also carry forward any amount that exceeds your AGI for up to five years.

Dual tax benefits for donating appreciated securities

If you have highly appreciated stocks, bonds or mutual funds or complex assets such as limited partnership interests, restricted stock, real estate and private equity, donating them to a qualified public charity or charitable giving vehicle offers two unique tax benefits:

  • You’ll avoid paying capital gains taxes when the assets are sold by the charity.
  • You can deduct the fair market value of the appreciated securities, up to 30% of your AGI. Any excess amount can usually be carried forward and deducted for up to five years.

To qualify for a 2018 tax deduction, the date of the gift itself must be no later than December 31.

Tax-free IRA charitable distributions

Those over age 70½ may be able to reduce or avoid paying income taxes on required minimum distributions (RMDs) from their Traditional IRA by directing the IRA custodian to distribute up to $100,000 to a qualified charity. Or you can specify that IRA assets be donated to charity as part of your estate plan.

Long-lasting implications?

While TCJA’s tax provisions for individuals are scheduled to expire in 2025, some of these provisions may be changed or eliminated for economic or political considerations before that time. That’s why if you wish to maximize the tax benefits of charitable giving while making sure they align with your financial plan, you should consult with an accountant, tax attorney or financial advisor to help you understand your options.

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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

© 2018 Canby Financial Advisors