Clients of The Gardner Group had mixed reactions when the Tax Cuts and Jobs Act became law in 2018. The law changed many aspects of their tax return, from increasing the standard deduction to limiting the state and local tax/property tax deduction. However, one of the major financial planning opportunities that emerged from the law was in the area of charitable giving.
Through 2017, taxpayers could deduct the full amount of their cash contributions to charity as long as the deduction didn’t exceed 50% of their adjusted gross income. Tax reform bumped the AGI limit on cash donations to 60%; carry-forward rules also allow donors who contribute more than 60% of AGI in a single year to carry forward the excess of the gift as a deduction for the next five years.
In regards to financial planning, with an emphasis on charitable giving, the most important change under the reform has to be the enhanced standard deduction. The standard deduction jumped to $12,000 for individuals and $24,000 for married couples filing jointly, nearly double the former standard deduction.
However, with that drastic increase comes the realization of the combined impact of the SALT [state and local tax] limitation and the elimination of miscellaneous itemized deductions, especially employee business expenses. Without a significant mortgage deduction, clients will probably be using the standard deduction. The question we are asking our clients is whether their charitable contributions are still deductible.
Internal Revenue Service statistics show that in past years approximately 30% of tax filers itemized instead of taking the standard deduction. With the impact of the new tax law and it’s various provisions, the number of people who itemize is expected to fall to about 10%. The Gardner Group does NOT want this to hurt the funding of your favorite charities because tax code no longer incentivizes tax payers when they donate and receive a tax benefit/deduction.
But wait……there’s more. Our old tax strategy of utilizing donor-advised funds just got even more beneficial for our clients with a plan! With this technique, our clients claim a charitable deduction the year they deposits the funds in your donor-advised fund. And remember, you can pay money out of the fund to various charities over many years with both Fidelity and Schwab’s DAF.
Our strategy going forward with donor-advised funds work under the same principle of bunching, but with even more flexibility as it allows you to fund the charities as you previously did. The deduction is based on when the money is put into the fund, not when it’s set to the charity of your choice.
A second enhancement for some of our (older) clients is the qualified charitable distribution, directly from your IRA. For our clients who have IRAs and are age 70½, they can take a qualified charitable distribution from their IRA. This distribution 100% bypasses the tax system because instead of receiving your RMD (and the 1099R), the money goes directly to your charity. This is good up to $100,000 of charitable contributions, and is extremely tax-efficient as it will offset the taxability of your required minimum distributions dollar for dollar.
To fund your donor-advised fund, it is always best to use appreciated stock. By using this strategy, clients get the deduction while avoiding the capital gains on the underlying assets.This makes it much more efficient way of contributing compared with selling the stock and then making the donation in cash.
The enhanced standard deduction does change things for all tax payers. However, do not get lulled asleep into thinking that you will get no more benefits for your charitable contributions. This is just another example of why planning matters!