The 2018 Tax Cuts and Jobs Act provided us an opportunity to review and update our advice related to charitable gifting tools and strategies.
As in previous years, taxpayers will be able to use the higher of their itemized deductions or the standard deduction. Unlike previous years, however, the new tax law eliminates many deductions while at the same time increases the standard deduction to $12,000 for individuals and $24,000 for married couples. At these levels, the standard deduction will exceed the itemized deductions for many filers, which has important tax implications for charitably-minded folks.
As an example, a married couple filing jointly with deductions totaling $20,000 (including a $2,000 annual gift to charity) would have itemized their deductions in the past, as those deductions exceeded the lower standard deduction in previous years. In 2018, however, that same couple would be under the $24,000 standard deduction threshold, which would mean that the $2,000 charitable gift effectively conferred no tax benefits to the donor.
But all is not lost. Folks who are unable to itemize should consider “bunching” multiple years’ worth of gifts into a single year, to maximize the tax efficiency of their gifts.
Continuing with the example, rather than make gifts of $2,000 annually over the next three years (and receive no tax deductions), the couple could instead make a $6,000 gift in 2018, thereby pushing their deductions over the $24,000 threshold and making some of the charitable gifts tax-deductible. Then they would not make any gifts in 2019 and 2020 and claim the standard deduction, before starting the cycle over again in 2021.
For people who know exactly which charities they wish to support, making a one-time “bunched” gift can be straightforward. For those who may not know which charities they wish to support over time – or who want flexibility in deciding what they support – a Donor Advised Fund (DAF) may be an elegant solution.
Donor Advised Funds have been around for some time, but they have received increased interest recently due to the tax law changes. DAFs themselves are charitable organizations: donors make an irrevocable gift into the fund and receive a charitable deduction in the year of the gift, but then can distribute “grants” out of the DAF to individual or multiple charities over subsequent years.
Contributions into the DAF stay within accounts administered by the donors. When donors wish to make grants out of their DAFs, the organization that operates the DAF reviews the request to ensure the receiving organization is an IRS-qualified charity and, upon approval, issues a check to the recipient charity.
While charitable giving offers potential tax savings, those savings should not be the main reason to gift. The primary reason to give should be a belief that the work undertaken by the non-profit organization is important and resonates with donors. Even with these new changes, we’ll continue to work with clients to find the most tax-efficient ways to meet their philanthropic goals. The DAF is one tool that offers an efficient, convenient and tax-advantaged way to gift while providing flexibility if the organizations and causes that donors support change over time.
The 2018 Tax Cuts and Jobs Act included significant changes to itemized deductions for tax years 2018 through 2025. The $20,000 deductible amounts shown in the example are for illustration purposes only.
Written by Austin Brown, CFP