Making the Most of Your Charitable Giving
Apr. 4, 2018 Article

TCJA & Making The Most Of Your Charitable Giving

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Jack and Jill are married and file a joint tax return. They typically have $12,000 in state and local income taxes (SALT) plus property taxes. They do not claim mortgage interest, but they do contribute $15,000 to charity each year. How will the new Tax Cuts and Job Act (TCJA) impact their deductions when filing their 2018 and 2019 income tax returns?

Under the new tax law, SALT deductions are limited to $10,000. With their charitable contributions remaining at $15,000, their itemized deductions would be $25,000 in comparison to the $27,000
of deductions they’ve had in prior years. Also with the new tax plan, there is a standard deduction of $24,000. If your itemized deductions are over $24,000, then it may make sense to utilize those vs. the standard deduction.

Could planning lower Jack and Jill’s tax bill for 2018 and 2019? Let’s look at two scenarios to see how they can not only lower their tax bill, but maximize their charitable contributions.

Charitable giving

In scenario 1, Jack and Jill itemize as they had planned in both 2018 and 2019. This provides $25,000 in deductions per year ($1,000 over the standard deduction in the tax plan) or a total of $50,000 over a two-year period.

In scenario 2, Jack and Jill decide to maximize their charitable deduction in 2018 by gifting $30,000 to a donor advised fund rather than gifting $15,000 in 2018 and another $15,000 in 2019. This provides them with itemized deductions of $40,000 in 2018. Since they would then only have the $10,000 SALT deduction in 2019, they instead take the standard $24,000 deduction. With this planning, it provides a total of $64,000 in deductions over two years, or an increase of $14,000 over scenario 1.

What Is A Donor Advised Fund?

A donor advised fund allows Jack and Jill to still gift $15,000 each in 2018 and 2019 (or lesser amounts over multiple years) while receiving an immediate deduction in 2019. The $30,000 remains in the donor advised fund until Jack and Jill specify to which charity they prefer it to be gifted. This strategy could be further improved by gifting appreciated shares of stock to avoid paying capital gains tax.

Qualified Charitable Distribution

For those who are over age 70-1/2 and choose to use the standard $24,000 deduction, consider utilizing a qualified charitable distribution (QCD). A QCD will count towards your required minimum
distribution (RMD) and will not increase your adjusted gross income. The distribution, though, must come from an IRA and the check must be made payable directly to a public charity. When filing your tax return, you will note the IRA distribution and QCD on form 1040 lines 15a and 15b. Line 15a is the amount of the distribution and line 15b is the amount that is taxable. For example, if your RMD is $25,000 (input on line 15a) and you make a QCD in the amount of $20,000, then only $5,000 (input on line 15b) would be considered taxable. QCDs are limited to $100,000 per individual taxpayer per year.

 

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