The Tax Cut & Jobs Act of 2018 (Tax Reform) almost doubles the size of the standard deduction from $6,350 to $12,000 for single taxpayers. For couples filing jointly the standard deduction increases from $12,700 to $24,000.
This will reduce the number of taxpayers who will itemize their deductions—including charitable gifts.
Tax reform may provide small to mid-sized donors with more disposable income. However, these same donors may not get any additional tax benefit for making a gift, depending on the size of their contributions.
Many nonprofit organizations are asking this question: “How will tax reform impact donations this year?”
So how can you still feel good about giving and get tax relief?
Make a gift from your IRA
A provision in the federal law helps local charities strengthen their communities by allowing individuals aged 70 ½ and older to transfer any amount up to $100,000 annually from an Individual Retirement Account (IRA) directly to a charity without being federally taxed.
The Community Foundation of Cleveland and Bradley County can help you execute the transfers and choose from several charitable fund options for their gift. Funds that qualify for the tax-free IRA transfers include unrestricted/community funds, scholarship funds, field of interest funds and designated funds. Donor Advised Funds do not qualify for tax-free IRA transfers.
Make a gift of stocks or mutual funds that have increased in value
Gifts of long-term appreciated stock or mutual funds offer an easy and tax-efficient
Way to establish your Donor Advised Fund (DAF) at the Community Foundation while
avoiding capital gains tax and reducing federal income tax.
Itemized deductions strategies and Donor Advised Funds
A donor-advised fund is a good vehicle to use in coordination with a tax savings strategy commonly known as bunching of itemized deductions. An example of bunching of itemized deductions involves doubling up tax-deductible payments into one year, then employing the standard deduction the following year. The process can be repeated over successive years.
Let’s look at an example assuming the following couple earns $100,000 a year has the following deductions:
Charitable Contributions $10,000
Mortgage Interest $4,000
Real Estate Taxes $3,000
Local Taxes $3,000
Total Deductible Expenses $20,000
Since the standard deduction for this couple is $24,000, they will get a $24,000 deduction. Over four years it would total $96,000 in deductions.
If they “bunch” their giving and contribute $20,000 to a Donor Advised Fund (DAF) every other year. In 2018 and 2020, they are able to itemize $30,000 worth of deductions. In 2019 and 2021, they take the standard deduction of $24,000 instead of itemizing. Their 4-year total deductions are now $108,000. You could also “bunch” your real estate taxes and realize even greater total tax deductions. Under this strategy, the same amount of giving over four years would yield additional tax deductions of $12,000 during the period.
Consistent contributions to charities through a Donor Advised Fund
Bunching of itemized deductions was already practiced by some, but without a Donor Advised Fund (DAF), our couple would have to drop large sums into charities one year followed by a year of no giving. With a DAF, you are able to get a significant tax benefit and distribute funds out of your DAF on a consistent basis over more than one year.
You can also list your fund at the Community Foundation as a beneficiary of a retirement plan, insurance policy, bank account or investment account. You can give the fund all or a percentage of the benefit.
These are suggestions. You should always consult your tax consultant, CPA or certified financial planner when considering your tax benefits and charitable giving plans.
For more information contact the Community Foundation.