Three Tips for Charitable Giving After the New Tax Laws

Three Tips for Charitable Giving After the New Tax Laws
By John Stolhman, CFP® & Laura Stolhman, CFP®

Under the new tax law, the ability to deduct charitable gifts remains intact! However, a couple of major factors of the new tax law will affect the number of taxpayers who will still be able to benefit from the deduction, namely:

  • The standard deduction was increased to $12,000 for single filers and $24,000 for joint filers.
  • Some itemized deductions were eliminated and others limited. One of the most significant caps is a $10,000 limitation on state & local taxes, including property taxes (SALT).

Because of these modifications, many more people will take the standard deduction, which means far less will itemize their expenses (such as property taxes and charitable donations). It is estimated that the number of taxpayers who itemize could be as low as 8-10%! Charities are concerned that the changes in tax deductibility for those using the standard deduction will result in fewer contributions. Ideally, people donate to charity to help their communities, churches, and other causes. However, there are many who are also motivated by the tax deduction. Here are a few tax-advantaged ideas of what individuals can do to benefit their charities:

  • Idea #1: Make a charitable gift of your RMD (Required Minimum Distribution)
    If you are over the age of 70 ½ and taking RMDs from your retirement accounts, you can direct those distributions straight to charities instead of coming to you, effectively getting a federal tax deduction of those funds (without needing to itemize). Starting in 2018, the IRS has declared that charitable donations from qualified tax deferred accounts (IRA, 401(k), etc.) will be exempt from taxation up to $100,000, if the charity meets IRS stipulations. This is good news for IRA and 401(k) owners who would like to be generous with their funds and avoid taxation on their distributions
  • .
  • Idea #2: Make a charitable gift of appreciated property If you own highly appreciated stock, mutual funds, or other property, gifting such assets to charity will let you bypass the capital gain tax bill that comes with selling those assets outright, thereby getting a bigger tax deduction – and giving more to charity.

    If you use the standard deduction: You will avoid the capital gain tax of up to 20% on the donation of property to charity even though you won’t be able to deduct it as a charitable contribution.

    If you itemize your deductions: You get a double benefit of avoiding the capital gain on the sale of property, as well as getting a deduction of the full market value on the date donated, thus magnifying the tax benefit of the gift.

  • Idea #3: Bunching charitable donations
    Let’s look at the idea of “bunching” charitable donations with an example:

Assume a married couple has $6,000 of mortgage interest and has SALT (State and Local Taxes) capped at the new limit of $10,000. With the new standard deduction of $24,000, the couple would receive no tax deduction from the first $8,000 of charitable donations because using the standard deduction would be the better option.

Now, imagine if the couple decides to give to charity every other year – once every 2 years. Let’s assume they normally give $7,000 per year (that would now be non-deductible). However, if they give $14,000 every other year, in the year of the gift they would be able to deduct $6,000 because the total itemized deductions of $30,000 exceeds the standard deduction of $24,000.

One vehicle that can enable this type of strategy is donor advised funds (DAF). Taxpayers can cluster or bunch a few years of giving and claim the charitable tax deduction in the year of funding the DAF. The money can be invested and grow tax-free while waiting to be disbursed to the charity(s) over one or more years.

The tax benefits of the DAF can be magnified if appreciated assets are gifted to fund the DAF, thus avoiding the long-term capital gain on the contributed assets when they are sold, increasing available funds for charitable purposes, and reducing the giver’s tax. The types of assets that can be transferred to a DAF include cash, stock, mutual funds, and even real estate.

The purpose of this article is to provide general information regarding the tax law changes. Other variables may come into play in your situation, so please consult with your tax preparer or financial consultant regarding the topics discussed prior to implementation. If you would like to speak with one of us at Medallion Financial Group, please call us at (301) 990-9704.

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