With the new Tax Cuts and Jobs Act now in effect, there have been significant changes to how you can maximize the tax benefit of your charitable giving. Giving to non-profit organizations is about impacting an organization or cause that you feel strongly about, not about saving on taxes. However, that doesn’t mean that you shouldn’t consider how giving could help limit your tax burden while also maximizing the impact of your contribution!
Prior to the Tax Cuts and Jobs Act, about 70% of households claimed a standard deduction, rather than adding up their deductions in a process called itemizing. That means that for 70% of households the amount of state and local taxes, mortgage insurance, charitable giving, and other deductible items came out to less than the standard deduction amount. Those households just claimed the standard deduction because it was greater than the itemized amount. The other 30% of households had enough deduction items to report an amount that was higher than the standard deduction.
Enter the Act of 2017! The standard deduction for married couples was almost doubled, increasing from $12,700 to $24,000. As a result of the change in the standard deduction amount, the early estimates for the percentage of households who will itemize in 2018 will drop to about 10%. That means about two-thirds of households that itemized deductions in the past will begin using the standard deduction. Those households will no longer have an advantage by itemizing deductions, since their total mortgage interest, state and local taxes (now limited to a deduction cap of $10,000), charitable giving, and other deduction items will be less than $24,000 each year. (However, with the revised tax brackets for 2018 and beyond, most households will still see a net tax cut even without itemizing their deductions.)
So what does this mean for charitable giving and maximizing your tax benefit? There are several different strategies you could use to cluster your gifts together into a single tax year and thereby push your itemized deductions for that year over the $24,000 total. For example, if you are considering making a charitable gift each year for the next three years--2018/2019/2020, you might instead elect to make a single contribution in 2019 for the total amount you would have given over the three year period. Another strategy could be to use a donor-advised fund where you make a contribution to the fund that is irrevocable and deductible in the tax year it is given but the funds are not distributed to your organization(s) of choice until you instruct that the custodian of the fund make the gifts. A third example might be to create a private foundation, where like a donor-advised fund, the gift is irrevocable and deductible in that tax year but the funds are not actually distributed to the recipient organization until some point in the future when the foundation elects to transfer the money.
All three of these examples rely on pre-planning to cluster your deductible donations together so that you itemize in a specific year. We are working with these strategies for our Destiny clients. Don’t hesitate to let us know if you have any questions on how to build the best strategy for your specific situation.
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