Charitable Giving Under The New Tax Law

For the past two years, there’s been a lot of buzz about taxes, specifically the Tax Cuts and Jobs Act. The problem with all the media headlines and Internet chatter is that it doesn’t give you a clear idea of how the new tax code affects your life, nor does it provide practical steps to use these laws to your advantage. 

With tax season behind us, we can now see the impact the new tax laws had. One area with a lot of change is charitable giving. While many people focus on the new, higher standard deduction and fear that it will have a negative impact on charitable giving, there are also provisions in the law that increase incentives to give. Here is an overview of how the new tax law is changing your tax filing experience and some of the options you should consider for your charitable giving. 

TO ITEMIZE OR NOT?

Charitable giving is tax-deductible but only if you itemize your deduction. When you take the standard deduction, your charitable giving does not affect your taxes.

In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2018, the standard deduction for a single filer had almost doubled to $12,000. That means that a taxpayer needs to have over $12,000 worth of property and state taxes, interest payments, and charitable giving to receive any tax benefit from their donations.

The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions.

DEDUCTIONS ARE UP

The new law also increases incentives for giving, particularly for high-income earners. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI. 

Also, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now, high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.

HOW TO MAKE THE NEW TAX LAWS WORK FOR YOU 

Charitable giving doesn’t have to take a hit just because the standard deduction is higher. There are strategies you can employ to get the best tax deal while also giving back.

GIVE EVERY OTHER YEAR

How the law affects your giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may still be able to benefit from giving while also taking advantage of the higher standard deduction. You can do this by bunching your giving or doing several years’ worth of giving in one year.

For example, let’s say you are a single taxpayer who usually donates $6,000 a year and you have $5,000 worth of taxes and interest payments that are deductible. If you itemize, your deductions will total $11,000, which is less than the standard deduction. As such, you would take the standard deduction and miss out on the benefits of your charitable giving. 

Instead, what if you bunched your giving and only made donations every other year? In year 1 you wouldn’t donate anything, so you would take the $12,000 standard deduction. In year 2, you would give double and be able to itemize for a deduction of $17,000. If you repeat this pattern every other year, then you will get an extra $5,000 of deductions every other year that wouldn’t be available to you if you gave yearly. 

MAKE USE OF DONOR-ADVISED FUNDS

One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then distribute it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.

With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years. 

GIVE FROM YOUR IRA

If you are older than 70? and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it does not count as taxable income to you. 

With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to take advantage of this strategy. 

MAXIMIZE YOUR GIVING

Now that the new laws are active, we will finally see the real effects. No matter how they affect you, they don’t need to deter your generosity. You can still give back and receive tax benefits for it. If you want to know more about how to get the most out of your charitable giving or have any questions about the strategies mentioned here, the team at Haydel, Biel & Associates is here to help! Contact us at (626) 529-8347 or email Ricky directly at [email protected] to start maximizing your giving and minimizing your taxes.

ABOUT HAYDEL, BIEL & ASSOCIATES

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at [email protected].