Charitably-minded investors have a new priority to shoulder: protecting their charitable tax deductions. Since the Tax Cuts and Jobs Act of 2017 did not directly address donation deductibility, few realized the new law could directly impact the tax treatment of their giving.
The legislation increased the standard deduction to $12,200 for single taxpayers and $24,400 for those married filing jointly in 2019. Since the new tax law also imposed limits to other popular itemized deductions such as property taxes and state and local income taxes, it is estimated that millions of historical “itemizers” will now, instead, utilize the standard deduction.
As it turns out, the Tax Policy Center estimates that in response to the Act, the number of itemizing households decreased from about 37 million to about 16 million in 2018. Therefore, the estimated 20 million taxpayers that no longer itemize will receive zero tax benefit for their charitable donations. With this in mind, there are several strategies that taxpayers can implement to preserve their tax deductions.
Let’s use Jack and June as a simple example. The family’s combined income is estimated to be $200,000 for 2019. Over the course of the year, they give $10,000 to various charitable organizations. Their combined mortgage interest and property taxes are also $10,000. It’s clear that for 2019, the family will be better off choosing the standard deduction of $24,400 rather than itemizing (which would only deduct $20,000).
So, in this instance, Jack and June will receive no federal tax benefit from the $10,000 which they donated to charities. But since timing is everything, if Jack and June chose instead to “bunch” their charitable contributions—or contribute two or more years of contributions in one calendar year, they can essentially regain some of their philanthropy’s tax benefit.
In the alternative strategy, Jack and June decide to contribute two years of charitable contributions ($20,000) in January of 2020. They will take the standard deduction in 2019 but will now be able to itemize $30,000 in 2020. If their marginal tax rate is 24%, this timing strategy will save them approximately $1,344 in federal taxes for 2020 while giving the exact same amount to their charitable causes for the two-year period.
“Super-Bunching” with a Donor-Advised Fund
If this same family had the ability to front-load five years of charitable donations ($50,000) by using a donor-advised fund, they could reduce their tax bill by approximately $8,500 in the year of the donation. The donor-advised fund would also permit the generous family to spread out the actual gifts to charities over a five year period or even longer if desired. If this couple had the ability to donate appreciated stocks or mutual funds into their donor-advised fund, they would also save on any capital gains that they would otherwise eventually pay on the appreciated assets.
Qualified Charitable Distribution
Investors over age 70½ may satisfy all or part of their IRA distribution requirements by making payments directly from the IRA into a qualified charity – a tax strategy many seniors have utilized over the past several years. In light of the new tax law, the qualified charitable distribution (QCD) has become even more beneficial. For taxpayers with required minimum distributions (RMDs) from IRAs or inherited IRAs, donating directly to a charity will reduce their taxable income, giving them a tax benefit that is independent of the new standardized deduction limits. The maximum annual amount that can qualify for a QCD is $100,000.
To discuss these or any other gifting strategies, please contact your SYM advisor.