Ways to give to charity and still reduce your taxes

By David T. Mayes

Posted Nov 3, 2019 at 3:01 AM

The tax law changes that took effect last year under the Tax Cut and Jobs Act (TCJA) have caused many taxpayers to re-evaluate their charitable giving strategies looking for ways to support their favorite causes while preserving some tax benefits for their gifts.

While the TCJA actually expanded the amount of charitable contributions that could be deducted for eligible taxpayers, bumping the maximum deduction from 50% of Adjusted Gross Income to 60%, the increase in the standard deduction to $12,000 for single taxpayers ($12,200 for 2019) and $24,000 for joint tax filers ($24,400 for 2019) means a taxpayer has to have a significant amount of other deductions in order to receive a tax benefit from their charitable giving. True, the tax savings tied to charitable giving may not be the primary reason for making donations for many taxpayers, but it certainly provides some extra incentive.

The key here is that charitable contributions are only tax-deductible for taxpayers whose itemized deductions exceed the standard deduction. For most taxpayers, the largest itemized deductions are mortgage interest and state and local taxes. The fact the TCJA limits the deduction for state and local taxes to $10,000 ($5,000 for married taxpayers filing separate returns) further limited the number of taxpayers who can itemize and receive a tax benefit for their charitable contributions.

Taxpayers whose other itemized deductions will put them close to the standard deduction might want to consider altering the timing of their charitable gifts to preserve the tax benefit from these contributions. For example, suppose a married couple typically donates $2,000 annually to various charities. Living in New Hampshire, they pay no income tax because their interest and dividend income is under the $2,400 per person exemption amount, but their property taxes and vehicle excise taxes are $9,000. This is less than the $10,000 state and local tax deduction cap so the $9,000 is fully deductible. Their other itemized deduction is $12,000 of mortgage interest. With the $2,000 of charitable contributions, their itemized deductions are $23,000 leaving them using the $24,400 standard deduction for 2019 with no extra tax benefit from the charitable gifts. If they instead “bunched” their planned charitable gifts into a single tax year, giving $4,000 every other year, for example, they would preserve at least some of the tax advantage from their charitable contributions.

The downside to this approach is that charities rely on consistent annual support so delaying gifts may not be ideal. One solution to this problem is to make larger but less frequent gifts to a donor-advised fund, which triggers a tax deduction in the year these contributions are made, then direct that the fund makes the planned annual gifts to the taxpayer’s favorite charities.

For retirees who have paid off their mortgages leaving a wider gap between their charitable contributions and the standard deduction, there is another provision in the tax code that may be ideal for making tax-advantaged charitable contributions. Retirees with traditional IRAs who have reached age 70?, at which point they must start taking required minimum distributions (RMDs) from these accounts, it can be advantageous to direct some or all of these distributions to be paid to a qualified charity. These “Qualified Charitable Distributions” do not get included in taxable income but still count toward satisfying the taxpayer’s RMD. By making charitable contributions directly from an IRA then, retirees can see a tax benefit both from reducing their otherwise taxable income, but also taking full advantage of the wider standard deduction. The tax rules allow up to $100,000 to be distributed from an IRA to charity so most taxpayers would be able to direct all their annual RMD to charity if they were so inclined and did not need the income for living expenses. For high-income retirees, making QCDs may also provide an additional benefit by keeping their income under the Medicare premium income thresholds.

Note that QCDs must meet certain rules to avoid being included in income. First, the charity must be a 503(c)(3) organization, which rules out directing QCDs to private foundations and donor-advised funds. Also, distribution checks must be made payable directly to the charity, not to the IRA owner. Most custodians will send the check to the IRA owner if desired so that they can deliver it to the charity themselves.

David T. Mayes is a Certified Financial Planner professional and IRS Enrolled Agent at Three Bearings Fiduciary Advisors, Inc., a financial planning firm in Hampton. He can be reached at (603) 926-1775 or [email protected].