One of the major changes that were made to the tax code by the Tax Cuts and Jobs Act of 2017 was the expansion of the Standard Deduction to $12,000 for individuals and $24,000 for married couples. This means that going forward, many more taxpayers will be taking the standard deduction rather than itemizing.
While increasing the standard deduction was an important step toward tax simplification, it also means that for taxpayers who will no longer itemize, they will get zero tax benefit from making charitable deductions. However, all is not lost. There are several strategies for getting at least some tax benefit from your charitable giving:
- The first and most basic approach is to control the timing of your charitable contributions. In other words, if you are a taxpayer who is close to clearing the standard deduction hurdle, you may want to consider making multiple years’ worth of contributions in a single year.
- Another related strategy is to use a Donor-Advised Fund. A Donor Advised Fund is a tax-preferenced investment account specifically earmarked for charitable giving. With a Donor Advised Fund, a donor can make a single large contribution, claim a deduction up front and then direct funds to eligible charities over time. A Donor Advised Fund can also be used to facilitate the in-kind donation and liquidation of appreciated stock, which provides the added benefit of allowing an investor to completely avoid capital gains tax.
- A third option that is available to taxpayers over age 70 ½ is the Qualified Charitable Deduction, or “QCD”. To facilitate a QCD, a charitable contribution is made directly from an IRA to a charity. This strategy allows a taxpayer to donate pre-tax IRA dollars that would have otherwise been taxable, effectively restoring the tax deductibility of the contribution even if they don’t itemize.
These are just a few ideas on how to preserve the tax benefit of charitable giving. For more information please contact our offices.