March 14, 2018 | Strategies
While tax reform has not gotten rid of charitable deductions, it has dramatically changed how most taxpayers will use them in figuring their taxes. In prior years it is estimated that up to 36 million tax payers claimed a charitable deduction. The old system of itemized deductions made charitable deductions valuable for anyone who itemized and did not take the standard deduction. The new tax law seeks to simplify individual income taxes by sharply reducing the number of taxpayers who itemize their tax deductions. The new law provides that single taxpayers can claim a $12,000 standard deduction and married taxpayers can together claim a $24,000 standard deduction. By almost doubling the standard deduction, the new tax law has reduced the value of itemizing deductions for the vast majority of taxpayers.
There are, of course, numerous non-tax reasons to continue to make charitable contributions. But a taxpayer who wishes to be able to deduct such charitable contributions will now need to have itemized deductions that exceed the increased standard deduction amounts. For example, a married couple that donates $10,000 a year to charities, has $10,000 of state and local tax deductions, but has no other itemized deductions because they’ve paid off their mortgage would not be able to itemize their deductions and should take the $24,000 standard deduction. If the couple were to “bunch” their charitable gifts, however, by not donating every year, they could then take advantage of the itemized tax deductions in years when they did donate. If the couple waited a year and donated $20,000 to charity in the second year, they would then have $30,000 in itemized deductions (the $20,000 charitable deduction plus the $10,000 of state and local tax deductions) and would be able to itemize and get the benefit of the charitable deduction.
Bunching charitable deductions can be linked with additional strategies that result in favorable long-term gift planning and tax planning. For example, a “bunched” contribution, like the $20,000 described above, can be made to a donor advised fund (“DAF”). A DAF is an account with a financial institution where charitable contributions are invested and grow tax-free. The DAF donor can direct that donations be made to certain charities each year. The initial large contribution to the DAF allows the taxpayer to itemize deductions in the year of contribution, begin to invest the contribution, and then make annual distributions to charities. For taxpayers who are willing to make especially large charitable contributions, even more sophisticated techniques like charitable remainder trusts and charitable lead trusts can maximum income tax results and minimize estate and gift tax liabilities.
Taxpayers who are older than 70 ½ can also make distributions of up to $100,000 directly from their Individual Retirement Accounts. Such a direct contribution allows the taxpayer to avoid taking the distribution into income.
Our experienced tax attorneys can help guide you through the various strategies available. Please contact us today if you would like to explore your charitable planning options.