As the Thanksgiving Holiday approaches and we focus on what is most important in life, many will also begin planning for their annual charitable contributions. One of the most gratifying aspects of my job is helping people achieve a charitable intent, which ultimately manifests itself in a positive benefit on our community. I am amazed by the generosity of those I have the privilege to work with, and this generosity is pervasive throughout our community. In fact, in 2017, Forbes magazine ranked Alabama 5th in the country in terms of charitable giving based on population, which is something we should all be proud of! While tax benefits are not the primary force behind most giving, the government established these benefits to encourage charitable gifts. This year, as you begin making decisions about your gifting, there are a few things to consider based on recent changes in the tax law. My partner, Marshall Clay, JD, CFP®, is here to discuss these changes and strategies to consider, as a result.
Stewart: What changes in the tax law should people be aware of in terms of their charitable gifting for 2018?
Marshall: The biggest change to be aware of is the increase in the standard deduction from $6,000 to $12,000 for individuals, and $12,000 to $24,000 for married couples filing jointly. These increases, along with the reduction and elimination of certain miscellaneous itemized deductions, make it more likely taxpayers will claim the standard deduction as opposed to itemizing their deductions. This change is important to understand as it pertains to charitable gifting, as the tax benefits of gifting in 2018 may be much lower for certain tax payers as opposed to 2017. Tax payers should confirm with their tax advisor about how they will claim their deductions to set expectations about the ultimate tax benefit of any charitable gift.
Stewart: For those taxpayers that itemized deductions in 2017, and find themselves claiming the standard deduction in 2018, how can they maximize the tax benefit of charitable gifts?
Marshall: Below are a few options:
- Accelerate Your Gifts: One strategy we recommend is to accelerate, or move forward, anticipated future charitable donations. In 2018, the IRS established a new limit of $10,000 on state and local tax deductibility and eliminated many miscellaneous deductions. As a result, unless other combined deductions, which typically consists of home mortgage interests and qualified medical expenses exceeding 7.5% of adjusted gross income (AGI), exceed $14,000, a married couple filing jointly will claim the standard deduction, or $24,000.
For example, if you are a married couple filing jointly, have a $10,000 state and local tax deduction, no home mortgage interest because you own your home outright, no medical expenses, and gift $10,000 to charity, you would receive no tax benefit for that gift. Your deductions would be $20,000, so you would claim the higher $24,000 standard deduction. An alternative approach, if you plan to gift $10,000 per year moving forward, is to gift 3-5 years of anticipated gifts in one year ($30,000-$50,000) if possible. If we take the same scenario above, and assume $30,000 of charitable contributions, instead of $10,000, your itemized deductions would now be $40,000 instead of $20,000, which is $16,000 above the standard deduction of $24,000 and saves you $3,840 in tax assuming a 24% Federal Tax bracket. To execute this strategy, make donations directly to specific charities (**Make it known the donation is for the next 3-5 years**), or establish a Donor Advised Fund, which offers an immediate tax deduction and gives you the flexibility to make the gifts later. While this strategy takes a big commitment on the front end, it leads to substantial tax savings.
- Qualified Charitable Distributions (QCDs): This strategy involves those age 70 ½, or older, and taking Required Minimum Distributions (RMDs) from Traditional, or Rollover IRAs. The law allows these individuals to make Qualified Charitable Distributions (QCDs) directly to qualified charities and exclude that distribution from income. Remember, the money coming from these accounts has never been taxed, so making these distributions allows you to accomplish a charitable intent and avoid paying the tax a normal distribution would entail. This strategy is particularly valuable if your annual RMD exceeds your cash flow need, and you claim the standard deduction instead of itemizing your deductions. Remember, the income is being excluded, and is not classified as a deduction.
Additionally, by excluding these donations from income you may also save money on Medicare Part B and D expenses.
For example, if you file a joint return and your total adjusted gross income (AGI) is $174,000, then you are subject to income adjusted Medicare Part B and D premiums of $66.50 per person per month. By giving $5,000 from your RMD directly to a charity (QCD strategy) you reduce your adjusted gross income to $169,000. This puts your income below the threshold of $170,000 and saves a couple $1,596 for the year! Not a bad deal! **Important Note**: Medicare uses a two-year look-back period to determine one’s current year income threshold, so be patient to get your tax benefit.
In summary, remember these QCD rules:
- You must be age 70 ½, or older, to qualify
- The strategy only applies to IRAs, not other retirement plans like 401(k)s
- QCD transfers cannot exceed $100,000 per tax year
- It is not considered a charitable deduction, but simply an exclusion from income
Thanks, Marshall! Happy Thanksgiving and Happy Giving!