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As a significant tax overhaul, the Tax Cuts and Jobs Act could influence the way taxpayers give to charity. Below are the trends taxpayers may see in 2018 and strategies to get the most out of their charitable giving.
The increase in the standard deduction means that itemizing tax deductions each year won’t make sense for many donors. Many taxpayers won’t collect the necessary deductions to surpass the new standard deduction threshold. And the elimination or reduction of so many popular deductions will only put itemization further out of reach.
A tax-smart strategy to overcome this issue is called “bunching,” where a taxpayer groups together their deductions into a single year in order to surpass the itemization threshold. In off-years (or “skip-years”), they take the standard deduction.
Using this strategy, donors contribute multiple years’ worth of their charitable giving in one year to receive a greater deduction. By placing that money in a donor-advised fund, the donor creates a cache of available funds to continue their regular yearly support to charities. They can maintain their steady stream of charitable giving in a tax-efficient way.
In years when taxpayers experience a high-income year or windfall, charitable giving could play a significant role in managing the associated tax burden. The new tax law increases the AGI limit on cash charitable contributions from 50% to 60% and repeals the Pease limitation. These changes mean taxpayers can receive a greater deduction for greater giving. Moving funds from a windfall into a donor-advised fund allows donors to create a well of charitable dollars that can support their giving in years of less income.
The continued strong economic climate of 2018 brings the potential of high capital gains for many investors. Donating appreciated securities to charity will reduce income tax liability and eliminate capital gains tax on the assets.
In addition, while the tax law increases the AGI limit on cash contributions, it maintains the rule that 30% of AGI can be contributed in securities. Maxing out the 30% limit in securities before contributing cash is a very tax-efficient method of charitable giving.
The continued bull market and newly reduced corporate tax rate will likely create an active mergers and acquisitions environment in 2018, which can expose investors to capital gains even if they are not selling stock. Tax-smart investors will watch for potential M&A activity in their portfolios and act before they accrue forced capital gains. Charitably-inclined investors may choose to donate their appreciated securities as a smart solution for eliminating capital gains tax.
A donor-advised fund is an ideal vehicle to enable smart, tax-efficient charitable giving. Donors can make a charitable contribution, become eligible to take an immediate tax deduction for the amount contributed, and then support their favorite charities in a time frame that works for them. Donor-advised funds make it easy to contribute appreciated securities as well as support the “bunching” strategy noted above. They are quickly becoming a go-to solution for Americans to manage their charitable giving.