As the dust settles from tax reform, you may be left with questions: Will my former tax strategy still work? Is there anything I should do differently? And what does it mean for my charitable giving? These tax code changes could affect how much you’ll want to donate this year before the Dec. 31 deadline, so it is essential to understand the giving strategies that could benefit the causes you support while ensuring you get the most out of your hard-earned money.
Following are answers to the top questions you may be asking in the wake of the new tax law.
Can I still take a charitable deduction?
Yes. Congress continues to value the charitable deduction and supports the tax incentives associated with giving. If you itemize your tax deductions, you can still take a deduction for a charitable contribution; in fact, it was expanded in some cases.
Will the increased standard deduction affect the tax benefit I receive for charitable giving?
It could, but it depends on your specific situation.
The standard deduction nearly doubled to $12,000 for individuals and $24,000 for married couples filing jointly. As a result, the number of households itemizing their deductions is expected to drop significantly—from about 37 million to about 16 million in 2018.1 Although more middle-class families are expected to opt for the standard deduction, wealthier taxpayers will likely continue itemizing their deductions.
If you’re in the latter group, with deductions totaling well over $12,000 (or $24,000 if you file jointly), your charitable deduction will likely remain the same. But if you itemized your deductions in the past, and will now instead take the standard deduction, you will no longer receive a specific tax benefit for charitable giving.
How could the change in state and local tax deductions impact my giving?
The tax reform law capped federal deductions of state, local and property taxes at $10,000, which could disproportionately affect residents of high-tax states such as New York, New Jersey and California.
New Yorkers, for example, deducted an average of $21,000 in state and local taxes in 2014.2 That deduction would help you reach the itemization threshold easily. Capping the state, local and property tax deductions at $10,000 means that you could have more difficulty collecting enough deductions to itemize. And if you no longer reach the threshold to itemize, you won’t be able to deduct your charitable donations.
What is the “bunching” strategy and how could it help me?
One tax strategy is called “bunching.” This is when you surpass the itemization threshold by bundling together your tax deductions into a single year, and then take the standard deduction in interim years. This requires careful and intentional timing of expenses you want to deduct.
While you can mix and match any deductions to reach the threshold, charitable giving is an easy lever to pull to put you over the top. Accelerating your giving and donating two years of contributions in one year can go a long way to helping you reach the threshold. It can also help you give more to charity and save more on taxes in the long run.
Take this simple example. Let’s say you and your spouse own your home with no mortgage, and your annual property taxes are $12,000. You usually give about $10,000 annually to a nonprofit. Your itemized deductions would total $20,000 (the new law caps your property tax deduction at $10,000). If these are your only deductions, it would make sense to take the higher $24,000 standard deduction.
However, if you “bunch” your charitable deductions by making two years’ worth of contributions in one year, your itemized deductions of $30,000 would exceed the standard deduction by $6,000. And if you place your charitable dollars into a donor-advised fund, you can maintain your steady, yearly support to nonprofits of your choice.
Donors who have variable income or the flexibility to defer or accelerate income can take advantage of this strategy for potentially greater tax efficiencies.
Watch how bunching works
Can I still receive a tax benefit for donating assets other than cash?
Yes. Contributing appreciated securities to charity continues to be an invaluable tax strategy, especially with a strong stock market and a reduced corporate tax rate. It’s important to keep in mind that laws limiting your charitable deduction of appreciated securities to 30% of AGI still exist.
With the new tax law, it may be a good time to look at new ways to donate—particularly if you are normally a cash donor. Donating appreciated securities means you don’t have to use your after-tax income for giving. Even more importantly, you will avoid capital gains tax that would be due if you sold the securities. Donating highly appreciated assets can reduce your overall income tax liability, eliminate capital gains tax and provide a larger donation to charity.
Learn more about donating appreciated securities
With the new tax law, it may be a good time to look at new ways to donate—particularly if you are normally a cash donor.
How does tax reform create a greater incentive for me to give more?
Two tax code changes will make it beneficial to give more to charity, particularly if you are a high-income earner.
Before tax reform, you could take a deduction for your cash charitable contributions totaling up to 50% of your adjusted gross income (AGI). The new tax code has increased that limit to 60%, meaning you can take an even larger charitable deduction for greater giving. This could be a tax-savvy move for years when income is particularly high.
In addition, the Pease limitation, which phased out as much as 80 percent of the benefits of charitable and other itemized deductions for higher income taxpayers, was repealed. If you’re a high-income taxpayer, this means there is now no limit on your total charitable deduction and you can keep more of your itemized deductions.
Explore more tax strategies for giving
What is a donor-advised fund, and how could it help after tax reform?
A donor-advised fund is a simple and efficient way to use some of the charitable tax strategies that are most effective after tax reform, such as donating appreciated stock, bunching or front-loading giving in a high-income year. A donor-advised fund, like the Giving Account at Fidelity Charitable, is a dedicated charitable account used for the sole purpose of supporting charities you care about. You are eligible for a 2018 deduction for contributing funds to Fidelity Charitable, which is a public charity. Then, you’re able to support virtually any IRS-qualified public charity on the timetable that best suits you by recommending grants from the Giving Account to the charities you care about. The Giving Account balance also can be invested for potential growth, possibly resulting in even more money for causes you care about.
Learn more about donor-advised funds
What steps should I take next?
It’s a good idea to review your tax strategy and explore all options for maximizing your tax savings. It could also be the right time to meet with your CPA or financial advisor to discuss your charitable giving plan and make sure it’s up-to-date with the current tax law.
The deadline for donating to be eligible for a 2018 income tax charitable deduction is December 31. With many people having gains in their investment portfolios due to the long bull market, coupled with the impact of tax reform, it’s more important than ever to make savvy financial decisions about giving. A little planning can ensure that you’re making the right moves—both for yourself and the charities you support.
Want to take advantage of tax-smart giving methods this year to make the most of your donation?
Find out if a donor-advised fund is right for you by taking this quick 6-question quiz.