Your alma mater. Victims of natural disasters. Children, veterans, the homeless. Whatever your cause, most of the world’s charitable organizations cannot survive without the generosity of their benefactors.
In the U.S., those who give are also rewarded by the ability to itemize donations on their federal tax returns as a deduction against their taxable income. For some, it’s the incentive for their largess; others, a nice bonus for a check they would have written anyway. However, starting in 2018, many of us with philanthropic tendencies will need to rethink our charitable giving strategies.
Under the December 2017 passage of the Tax Cuts and Jobs Act (TCJA), starting in 2018 the standard deduction for a married couple filing jointly begins at $24,000, up from $12,700. What this means is that you will only receive tax benefits for donations once you exceed $24,000 of deductions.
As an example, start with the maximum allowable state and local tax (SALT) deductions recently capped at $10,000 under TCJA. Add onto that $6,900 in home mortgage interest. If your typical charitable donations are $10,000, that brings your total deductions to $26,900. In 2017, you would have gotten credit for all $10,000 of that donation; in 2018, only $2,900.
According to industry predictions, more than 90% of U.S. taxpayers will take the standard deduction going forward and will no longer itemize their deductions.1 If you are charitably inclined, we recommend that you speak with a financial advisor to explore the concept of planned giving, which combines your charitable goals with your personal financial strategies to help maximize the tax benefits allowed under the new tax law while still supporting the charities that are important to you.
The following are strategies your financial advisor may recommend; they are not necessarily new, just more relevant NOW under the new tax law.
- Lumping Charitable Contributions: Rather than making an annual donation, consider an every-other or every-third year donation to maximize the tax benefits. For example, if you are a married couple filing jointly and contribute $10,000 per year to your favorite charity, you may not receive any tax deduction for those gifts in 2018. Instead, if you were to make a $30,000 gift every three years, you would be able to itemize the donation in the year the gift is made and receive the tax benefit above the standard deduction of $24,000.
- Donor-Advised Funds: This is a philanthropic vehicle in which you receive an immediate tax deduction and have a platform for issuing grants to one or more charities of choice. The fund is established similarly to a brokerage account where the contribution is invested and grows tax-free. The fund administrator manages the disbursements to the charities of your choice. One of the benefits of this fund is its flexibility for additional contributions in the future.
- Charitable Remainder Trusts: This is a type of irrevocable trust whereby you receive an immediate tax deduction on part of your donation. The allowable deduction is based on factors including age and the amount of income withdrawn on an annual basis. A Charitable Remainder Trust generates an income stream for life, or for a specific period of time, for you or other specified beneficiaries, with the remainder of the trust going to the designated charity.
- Charitable Lead Trusts: This is another type of irrevocable trust through which you receive an immediate tax deduction. The difference between this trust and the Charitable Remainder Trust is the order of who receives the payments of the remainder. With the Charitable Lead Trust, the charity is designated to receive the annual income, while your beneficiaries receive the remainder of the trust.
- Qualified Charitable Distributions (QCD): If you are age 70 ½ or older, you can distribute up to $100,000 from your IRA as charitable contributions and satisfy your required minimum distribution (RMD). Simple to implement, a QCD reduces your taxable income and, for most people, can be more beneficial than an itemized deduction.
Which strategy is right for you? There are a few things to consider:
- Additional out-of-pocket costs. With both Charitable Lead and Charitable Remainder Trusts, you will incur additional expenses for an attorney to draft the required paperwork and an accountant to file a separate tax return. With a Donor Advisor Fund, you will also pay administrative fees, but there is no additional legal or accounting work required.
- Income benefit. Under the Charitable Remainder Trust, you or a beneficiary would receive the income; but with the Charitable Lead Trust, the income goes to the charity.
- Tax deduction? Maybe not. It’s important to remember that you may not receive a tax deduction for smaller charitable contributions. While that shouldn’t be the primary driver for your charitable giving, it’s important to remember and incorporate into your plan.
- You are not limited to one. These strategies are not mutually exclusive; any one of the trusts can be married to a lumped charitable contribution or a QCD.
You may already have one or more of these charitable giving strategies in place and are ready to meet the new tax law head on. But if this is all new to you, rest easy, there is still time to reexamine and revamp your strategies for 2018 and create a new planned giving strategy for 2019 and beyond. Contact your financial advisor for a full review of your current strategy today so you can keep on giving.
1. Gleckman H. Twenty-one million taxpayer will stop taking charitable deductions under TCJA. Tax Policy Center, Urban Institute & Brookings Institution. https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja. Accessed June 14, 2018.