You may not want to think about it, but tax season is just around the corner. We’re coming up on the 2-year anniversary of the Tax Cuts & Jobs Act being signed into law. And now that we’ve had some time to see how the changes panned out, we can take what we’ve learned and help you with practical steps to apply these laws to your advantage, particularly in the area of charitable giving.
While many people focus on the new, higher standard deduction and fear that it will have a negative impact on charitable giving, there are also provisions in the law that 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In addition, the new law repealed the Pease limitation.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.
How To Make The New Tax Laws Work For You
Charitable giving doesn’t have to take a hit just because the standard deduction is higher. There are strategies you can employ to get the best tax deal while also giving back.
Bunch Your 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 take advantage of 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 start preparing for tax 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 give back, easily schedule a no-fee, no-obligation virtual appointment or contact us at 801-839-7050 or Austyn.Whittenburg@LFG.com.
Austyn Whittenburg is a wealth planner and partner at Whittenburg Wealth Partners, a family-owned and family-operated financial and wealth management firm located in Salt Lake City, Utah. Austyn has 7 years of experience as a wealth planner and spends his days helping business owners, emerging successful families, and their ensuing generations simplify their financial lives and discover meaningful solutions. Austyn received a Bachelor of Science in Finance from Brigham Young University and holds the Certified Financial Planner™ (CFP®) and Certified Business Exit Consultant (CBEC®) credentials, his FINRA Series 7 and 66 registrations, and his life, health, disability, and annuity insurance licenses. Austyn has received high accolades from his broker-dealer, Lincoln Financial Advisors, for his commitment to always putting his clients’ needs and objectives first. Austyn is active in his community of South Jordan, Utah, where he resides with his wife, Ciera, and two young sons, Grayson and Graham.