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Tax reform and year-end giving: Two smart tactics to make contributions under the new law

Tax reform will impact charitable giving this year, but tax-savvy moves can benefit you and charities you care about.

Man and woman making a decision

Tax planning has always been an important part of charitable giving. However, since the Tax Cuts and Jobs Act (the Act) was signed into law in December 2017, your strategic decisions about the money you give are even more important.

The Act has significant implications for charitable giving, and certain tax law changes may influence when and how much Americans share. Many donors are expected to use tax-savvy moves to maximize their contributions and deductions. From a tactic called “bunching” to making strategic contributions to a public charity with a donor-advised fund program, here’s what you need to know to make the best decisions.

What the new tax landscape looks like

First, understand what changed and what didn’t. Under the Act, here’s what stays the same:

Ability to take charitable deductions

If you itemize your deductions, you still can claim charitable giving on your return and receive a tax benefit.

Carry Forward rule

This provision allows you to give beyond the charitable contribution limits in a given tax year and deduct the overage in later years—helpful with long-term tax planning.

Increased standard deduction threshold

Now the threshold is $12,000 for individuals and $24,000 for married couples—almost double the previous amounts. Thus, many Americans won’t have enough deductions to make itemizing worthwhile. The elimination of popular deductions such as some moving expenses, tax-prep fees and the interest on home equity loans will cause the number of people able to itemize their returns to shrink even further.

Capital gains rates

The long-term capital gains rate of 20% remains, along with the Medicare surtax of 3.8%. Therefore, when you give long-term appreciated assets to charity, you can preserve that 23.8%, enabling you to give more. You also can claim the fair market value of the assets as a tax deduction.

Key changes, however, may affect your decisions about how you give. Here’s a quick summary of what’s different:

Increased standard deduction threshold

Now the threshold is $12,000 for individuals and $24,000 for married couples—almost double the previous amounts. Thus, many Americans won’t have enough deductions to make itemizing worthwhile. The elimination of popular deductions such as some moving expenses, tax-prep fees and the interest on home equity loans will cause the number of people able to itemize their returns to shrink even further.

Increased limit amount for cash contributions

Taxpayers can deduct up to 60% of their adjusted gross income on cash donations—up from 50%. So you can deduct a higher amount of donations than in previous years.

Limited state and local tax (SALT) deductions

The Act puts a $10,000 cap on the amount of state and local income, sales, and property taxes that taxpayers can deduct. In the past, without a cap, SALT deductions could combine with charitable deductions to make meeting the standard deduction easier than it is today.

Repealed Pease Limitation

This is good news for high-income taxpayers. The Pease Limitation reduced the amount of itemized deductions by 3% of adjusted gross income over a certain threshold, until it phased out as much as 80% of the value of a tax payer’s itemized deductions. With Pease eliminated, high-income charitable givers can now deduct more.

How to maximize tax benefits in the new environment

If your current plan for charitable gifts doesn’t help you meet the updated standard deduction, you can use one of the following strategies to help you achieve the tax benefits of giving.

Use of “bunching” to receive tax deductions for donations

Many taxpayers are turning to “bunching,” a strategy that helps exceed standard deduction thresholds with charitable giving. With bunching, you save the deductions you would have made over several years and then group them together to exceed the standard deduction amount in a single tax year. The strategy allows you to take a charitable tax deduction every few years, as opposed to making charitable contributions year after year with no tax advantage at all. A New York Times article estimates this strategy can reduce taxes by $700 a year over a four-year period. Keep in mind that when you itemize, you can now deduct a greater portion of your income than in past years. Because you can deduct up to 60% of your adjusted gross income for cash contributions, many taxpayers are increasing their donations during the years in which they itemize. This helps the donor exceed the standard deduction, as well as provides valuable funding to charitable organizations.

Use of a donor-advised fund to achieve both tax deduction and giving goals

A donor-advised fund is a charitable investment vehicle that allows you to make contributions and receive an immediate tax deduction, while directing grants from the fund annually over time. It’s a perfect option for those who want to use the bunching strategy and maintain their giving habits each year.

Simply make your gift to the donor-advised fund during the year in which you plan to itemize your deductions, enjoying the immediate tax break for your contribution. Then you can make grant recommendations to any IRS-qualified public charity, even during the years when you’re not contributing to the donor-advised fund.

This type of fund allows gifts of cash through a check or wire transfer, but also offers a big tax advantage for gifts of non-cash assets. By contributing long-term appreciated assets such as bonds, stocks or real estate, fund donors can avoid the 20% capital gains tax and 3.8% Medicare surcharge they would have incurred by selling the assets. This allows them to give 23.8% more through the fund to their charities of choice, while also receiving a charitable deduction for the fair, full market value of the donated assets.

Why these tactics can benefit you

Receiving a tax deduction is likely not your main motivation for making charitable donations. However, by using tax-smart strategies you can:

  • Have more discretionary income to help organizations you care about by reaching the threshold for itemizing, which means you can take a deduction for charitable contributions.
  • Qualify for a tax deduction when you make your donation to a donor-advised fund by year-end.
  • Recommend which organizations receive grants from a donor-advised fund.

By employing the bunching strategy with a donor-advised fund, you can receive the maximum tax benefits while still having the freedom to make grant recommendations to organizations on the schedule that works for you.

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