After the 2017 Tax Cuts and Jobs Act went into effect in 2018, standard deductions went up—but other deductions also disappeared. As a result, many donors no longer have a tax incentive to be philanthropic, and charities have been hit hard.
The changes to deductions are technical, but well worth understanding.
- In 2018, the standard deduction was raised for single filers from $6,500 in 2017 to $12,000 in 2018 and $12,200 in 2019. Similarly, standard deduction for married filing joint filers went from $13,000 in 2017 to $24,000 in 2018 and $24,400 in 2019.
- Although this appeared to be a good thing, it was combined with the limitation of State, Local and property taxes to $10,000 and the reduction of mortgage interest deduction to the primary residence (not cabins or second homes) and no home equity loans except those used for actual renovations completed on the main home.
- Additionally, miscellaneous deductions were eliminated, which included tax preparation and investment management fees. These changes made it much more difficult for individuals to accrue enough deductions to itemize rather than take standard deductions.
Still, charitable donations can be a bright spot in itemizing deductions. Here are some tips to have donations make a bigger impact on your taxes:
1. Donate Appreciated Assets
Gift appreciated assets instead of selling stock or funds to give a cash donation. Most charities have the ability to accept stocks and mutual funds, especially if you give them a little notice. By donating the appreciated asset, you can claim the appreciated value as the donation value and the capital gains are not reported on your taxes.
2. Qualified Charitable Donations
If you are over the age of 70 ½ and must take required minimum distributions out of your pre-tax retirement account, those can be donated directly to a charitable entity. If you have all or any part of your required minimum distribution sent directly to a qualifying charitable organization, that withdrawal is not considered income to you. It will not affect your Adjusted Gross Income or be considered in the taxability of Social Security.
3. Combining Annual Donations into Every Other Year
If you were to combine 2 years of charitable contributions into one year rather than the same contribution every year, this can potentially increase deductions and save on tax payments.
Here is an example: Sam and Donna are married and are filing joint taxes. Their charitable donations are $10,000 per year. Their additional deductions for state and property taxes are $10,000 and mortgage interest is $4,500. Here is what their deductions look like in both scenarios:
|Total Itemized Deductions||24,500||24,500|
|Deduction Filing||Itemized Deduction||Itemized Deduction|
|Total 2-year Deductions||49,000|
|Total Itemized Deductions||14,500||34,500|
|Deduction Filing||Standard Deduction||Itemized Deduction|
|Total 2-year Deductions||58,900|
This second scenario allows for an additional $9,900 of tax deductions over 2 years.
4. Combine Option #1 and/or #3 with a Donor Advised Fund
A Donor Advised Fund is an account funded by one or more individuals and is used to make charitable donations. Donors take a tax deduction in the year they put money or appreciated assets into the account and can then disburse the funds to charities over multiple years. This helps the donor make the most of their deduction, while supporting charities that may have a difficult time accepting a large donation one year and then nothing the following year. Additionally, you can still donate appreciated assets to a charitable organization if they are not able to accept stocks or mutual funds.
There are many options of places to set up donor advised funds. Local community foundations, such as the St. Paul Foundation, Minnesota Foundation, or Minneapolis Foundation, have a lot of knowledge of the good work charities are doing. If you know what kind of impact you want to make, but don’t have a charity in mind, setting up a donor advised fund at a community foundation can give you access to a wealth of information and charities that have been reviewed by experienced philanthropic experts.
A Donor Advised Fund is a great opportunity to educate our next generation of charitable givers. An example would be to let each family member choose a charity to which they would like to donate. Have them research what the charity does and discuss why it is important to them. If they are able to make a strong enough case, write the check and allow them to take it to the charity.
Another opportunity to educate our next generation of money managers!