Charitable Giving? Planning Now Can Save You Big Bucks!

With the new tax law, you need to start planning your 2018 charitable giving now versus year-end. While the decision to give to charity is typically not driven by the tax benefits received, you still want to ensure you are maximizing your tax savings each year.   The new tax law nearly doubled the standard deductions so many people will choose not to itemize their deductions in 2018. To itemize on your 2018 tax return, a married couple would need itemized deductions to exceed $24,000 ($12,000 for single filers). Otherwise you would simply use the standard deduction and lose the opportunity to deduct charitable gifts.  Here are two planning opportunities for you to consider:

  1. If you are age 70½ or older, you can use a Qualified Charitable Distribution (QCD) to move money directly from your IRA to a charity.  For traditional and Inherited IRAs, you can direct a portion or all of your required distribution up to $100,000 to the charity and it is not counted as income to you. One of the biggest advantages is it lowers your Adjusted Gross Income which can keep you in a lower tax bracket overall which saves you taxes and possibly Medicare-Adjusted Premiums.  You need to work with your CPA and financial advisor to ensure you qualify and do the correct steps if gifting to charity.
  1. I call this the “bunch strategy”.  Instead of taking the standard deduction and losing the deductibility of your charitable contributions, with the bunch strategy you’d estimate your charitable contributions for, say, three years and make the entire contribution in one year where you’ll itemize your tax return; then use the standard deduction for the next few years with no charitable contributions and repeat the process.  If you don’t want to give three years’ worth of gifts all at once you can set up a donor advised fund.  A donor advised fund is a vehicle established through a public charity.  It allows you to make a charitable contribution and receive an immediate tax benefit in the 2018 tax year but you can distribute the money to the charities of your choice at any time including future years.  For example, if you give your church $3000 per year then you could contribute $15,000 to a donor advised fund and itemize your return.  You get the $15,000 deduction in this tax year but can give the money to the church over the next five years.

If you will have more income in a certain tax year than other years then it is a great way to maximize your tax savings in the year your income is higher and still give to the charities of your choice over several years.  We had a client who had wages of $50,000 that would be taxed at ordinary income tax rates and they had another $35,000 of dividends and interest income.  They donated $40,000 to a donor advised fund and therefore were able to offset most of their ordinary income.   They were able to pay very little tax due to bunching their donations in one year.   This strategy works best if your income will be lower in the years to follow so it enables you to maximum the tax savings when your income is at a higher level.   This is a great strategy to consider if you are about to retire and will have less income in the following years due to retirement.  This is also an excellent strategy if you have a ‘big event’ such as the sale of a business.  You can open a donor advised fund through The Community Foundation of Greater Birmingham, National Christian Foundation and many brokerage firms such as Charles Schwab and Fidelity have charitable divisions as well.

You must be proactive with tax planning and I advise you to consider your charitable giving strategies for this tax year and the years to follow.   You should always discuss these strategies with your tax advisor and financial advisor to ensure you are implementing the best strategy based on your situation.