Why Charitable Gifting May Not Result in a Lower Tax Bill in 2019
Volume 19, Issue 6
In this report, you will learn:
- The impact of the Tax Cuts and Jobs Act (TCJA) and how it may affect your taxes and charitable gifting
- Why your 2018 charitable gifts may not result in a lower tax bill this year
- Three ways you can make charitable contributions that will benefit you as well
- How using your Required Minimum Distribution (RMD) to satisfy charitable gifting can help you save on taxes
3 Ways to Continue to Give & Still Receive a Benefit
In our experience working with university professionals, we have found that the majority enjoy and are able to make significant charitable contributions. University professionals are a charitably-minded group, often giving generously to their alma mater,their place of worship, and many other of worthy organizations.
While the Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, many households are just now seeing the impact of this bill as they file their 2018 tax returns.
Under the new law, many university professionals will find themselves using the standard deduction instead of itemizing—which means charitable gifting may not have the added tax benefits they once enjoyed.
This report will explain why your contributions may not result in a lower tax bill this year, and reveal three strategies you can use to accomplish your charitable gifting while continuing to provide you with additional benefits in future.
Understanding the Changes
When filing taxes, there are two common ways in which you can decrease your taxable income for the year. You can either take the standard deduction as determined by tax law, or you can itemize deductions. Itemizing refers to grouping various items that qualify for a tax deduction and claiming the sum total. You would generally itemize if the sum total of your deductions is greater than the standard deduction you would have received anyway.
For years, charitable gifting combined with other itemized deductions common to university professionals, like state and local taxes, property taxes, mortgage interest, medical expenses, and unreimbursed employer expenses, had provided many in academia with a healthy, itemized tax deduction.
Fast forward to 2018 and the impacts of the TCJA. The act had a major impact on the itemized deductions outlined above. While state, local and real estate taxes can still be itemized, the total of these is capped at $10,000 per year. For those in high income tax states and/or high property tax states this led to a large loss of itemized deductions compared to the 2017 tax return. The unreimbursed employer expenses and other miscellaneous itemized deductions have been completely removed from the list of possible itemized deductions.
Here is a case study that helps illustrate the impact of these changes and what it may mean for charitable gifting.
Itemized Deductions Available
- Medical expenses that exceed 7.5% of your Adjusted Gross Income
- State, local, and real estate taxes (now capped at $10,000 combined)
- Mortgage interest (with certain restrictions)
- Charitable contributions
Taxes (state, local, real estate)
Misc. & Unreimbursed Job
Total Itemized Deductions
*$26,600 if married and over 65
As previously mentioned, medical expenses and charitable contributions continue to be tax deductible, so these numbers did not change.
Where you see a major impact is on the state and local taxes which represents a $25,000 difference in this example. Miscellaneous and unreimbursed job expenses are also no longer deductible, a $7,500 difference in our scenario. Taking a look at the total itemized deductions we can see the impact of the tax law change is equal to $29,750. (2017’s itemized deduction vs. 2018’s standard deduction)
We also see that in 2018 this particular couple will no longer be itemizing their deductions as the total is less than the standard deduction. The concern now is the $10,000 of charitable contributions they have made. With the larger standard deduction they really no longer receive a tax benefit from gifting. They could gift $0 and receive the same $24,000 standard deduction.
Alternative Ways to Give
Charitable gifting is not done simply for the tax deduction. It was a valuable benefit, but not the major reason for supporting one’s charity of choice. However, in light of the changes to tax law, many are wondering if it is possible to continue making these gifts while still receiving some kind of benefit. Below are three ways to receive additional benefits for your charitable gifts.
1. Gift Bunching
In the case study, the level of gifting is not high enough in one year to bring the itemized deductions over the standard deduction. With gift bunching, you “bunch” two years’ worth of gifts into one tax year in order to exceed the standard deduction threshold. Then you would take the standard deduction in the following year and repeat.
For example, in 2018 the couple in our case study would have wanted to fulfill both their 2018 and 2019 gifts before December 31, 2018. This “bunched” gift would increase their total itemized deductions to $31,250, putting them over the standard deduction. Assuming a 24% federal tax bracket, this would reduce the tax liability by over $1,700 every other year compared to taking the standard deduction each year and continuing to make annual gifts each calendar year.
2. Donor-Advised Funds
Often clients will have the concern of interrupting regular gifting when considering gift bunching. A potential solution to that concern is the concept of a Donor-Advised Fund (DAF). You can think of it as a holding tank for future gifts. This method provides you with the tax benefits of gift bunching while offering you the flexibility to send your gifts to any qualified charity at any time you wish.
If the couple in our case study planned to give the same $10,000 for the next 5 years or more, they could transfer $50,000 into a Donor-Advised Fund in 2018. They would potentially receive the full tax deduction of $50,000 in 2018, (subject to 50% of AGI limitation) and could then elect to make gifts out of this fund to their regular charities at any time until the account balance is exhausted. In this example, the couple would increase their itemized deductions to $61,250, representing a nearly $9,000 additional benefit in the 24% tax bracket. They would then take the standard deduction until the DAF is depleted.
Using a Donor-Advised Fund can also provide an additional layer of tax benefits, depending on how you choose to fund the account. For instance, appreciated stocks and mutual funds can be gifted to the fund instead of using cash on hand, which can be beneficial in some cases.
3. Qualified Charitable Distributions (QCD)
For those 70 ½ and over this may be the best option for gifting, especially if the Required Minimum Distributions (RMD) on their retirement accounts are not needed for income purposes.
With a QCD, an IRA owner can make a charitable gift directly from their IRA while at the same time satisfying their annual RMD. The IRA custodian will make a check payable to the charity and send the funds either to the account owner or directly to the charity. As long as the check is not made payable to the IRA owner, this transaction is not reported as income, but it does satisfy the annual RMD.
For example, if our case-study couple has annual Required Minimum Distributions (RMD) in 2018 that total $85,000. Rather than using extra cash on hand to make their annual gift, they could send the $10,000 directly from their IRA.
This would reduce the couple’s taxable income by the amount gifted, or $10,000. In this example, it would save this couple approximately $2,500 in taxes. Additionally, they could keep their $10,000 of cash on hand that they would have normally sent out to charities.
Talk to Your Tax Professional
There have been significant tax changes which may or may not impact the decision to give to charity. However, there are still viable ways to maximize the tax benefits available to the charitably inclined. Each situation is different, and examples presented in this report will each provide a different outcome.
As a part of Filbrandt & Company’s Total Solution©, proactive tax planning is a large consideration when we provide financial planning to our clients. We would be happy to discuss these proactive tax planning techniques in light of your overall financial plan. You can contact us to schedule a consultation.
The information provided is not, nor is it intended to be, legal advice. You should consult your attorney for advice regarding your individual circumstances.
Circular 230 Disclosure
We are required by Treasury Regulations (Circular 230) to inform the readers of this material that, to the extent that the information contained herein concerns federal or state tax issues, such information was not written or intended to be used, an cannot be used, for (1) avoiding federal or state tax penalties or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.
- To learn about the benefits you will lose in retirement, read this report: The 4 Employee Benefits You Must Replace When You Retire
- To learn more about the importance of seeking an independent fiduciary, read this report: Who Can You Really Trust With Your Financial Future?
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