Giving back to your community feels great for several reasons and many of us living in the United States are fortunate to have the relative prosperity to do so. For some, it’s an inherent part of their value system or they’ve had a personal experience that connects them to a particular cause and for others, there are financial benefits driving their decision to give. Whatever the motivation, charitable giving can be an important part of your overall financial plan and it’s important to understand how the recent tax law changes affect the financial impact of donating cash and securities to your favorite causes.
The most significant change to the tax code for most taxpayers is the increase in the standard deduction. The amount nearly doubled to $12,000 for single filers and $24,000 for couples beginning in 2018. This means that unless your total itemized deductions are over these amounts, you will no longer be able to deduct the amount of your charitable donations. As with any tax law change, it’s best to consult your CPA to assess the impact to your personal situation but there are steps you can take on your own to get started.
First, you’ll want to calculate the amount of your non-charitable, itemized deductions and take note that the tax laws may have changed these amounts too. For instance, state and local taxes (SALT) are now limited to $10,000/year and mortgage interest is deductible only up to $1 million dollars borrowed. Thus, if the total of your itemized deductions is as much as or more than the standard deduction, any charitable donations will be deductible.
If your itemized deductions are less than the standard deduction, here are a few suggestions to help you get the most out of your donations.
- Combine charitable donations into alternating years
One way to optimize your charitable donations is to combine your charitable budget for two years into one and make donations every other year. This may work for you if most of your donations are consistent from year-to-year.
- Set up a Donor-Advised Fund
The recent tax law changes have resulted in an increase in the number of donor advised funds (DAF). These are accounts that allow you to make charitable donations up front and give them out over the course of years or decades as you wish. The benefits of creating and contributing to a DAF are the ability to give more spontaneously than you would in the alternating year method and that you can deduct a larger amount in one tax year. In addition, you may have more flexibility to invest the assets in accordance with the time horizon of the gifting plan. There are several technical rules associated with these accounts, so you will want to speak with an advisor about your personal situation before making a decision about funding a DAF account.
- Donate Retirement Account Assets
Although you may not be able to deduct your contributions from taxable accounts, you can choose to gift the required distribution from your retirement account if you are over the age of 70 ½. Especially if you are working past the age of 70, this option has the benefit of reducing the amount of your overall income tax liability.
- Create a Charitable Remainder Trust
If you are considering gifting a considerable amount over your lifetime, these trusts provide the benefit of income for your lifetime and the remaining balance will go to a named nonprofit (or nonprofits) at your passing. The deduction for this type of account is limited to the income stream to you but it can be a great way to make a large donation of appreciated securities in one year. These trusts will require an attorney to draft the appropriate documents so it’s important to note that there are additional fees associated with the setup.
Regardless of the potential financial benefits, charitable giving and involvement can increase people’s happiness and overall life satisfaction. As always, consulting your CPA or financial advisor before making any final decisions is a smart idea.