Charitable Giving Under the New Tax Law

by Steve Larsen, CPA, CFP
Charitable Giving Under the New Tax Law photo

Even if your primary reason for giving is not the tax savings, that doesn’t mean you shouldn’t benefit from your generosity. But if you are not correctly strategizing your charitable dollars, you could be raising your tax bill.

Our charitable causes need us more than ever. Contributing our hard-earned money to our church or favorite charity is vital to keeping the non-profit sector running. They rely on our donations, and we rely on the tax benefits those donations offer us when it’s time to file our taxes for the year.

Since the introduction of the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, realizing the tax benefits of charitable giving has become more difficult. Writing a $100 check to the local homeless shelter used to equal a $100 reduction in your taxable income, but it’s not that simple anymore. Now, it’s important to look at every gifting strategy available to ensure you aren’t paying more in taxes than you need to.

What Changed?

To understand what has changed, let’s look at an example of how a couple filed their taxes before the TCJA took effect. In 2017, the standard deduction was approximately $13,000 for a married couple filing a joint return. Typically, a taxpayer would add up their property taxes, state income tax, home mortgage interest, and charitable contributions. They would then deduct from their income either that sum or the $13,000 standard deduction, whichever was higher.

Since most couples had enough property and income tax to clear the $13,000 bar, each additional dollar they spent on taxes, interest or charitable contributions lowered their taxable income.

In 2018 (under the TCJA) the $13,000 number has increased to $24,000! The higher number is great news overall; now, you get to deduct the total of your taxes, interest, and charitable contributions, or $24,000.

The only downside is that millions of Americans fall well below the $24,000 threshold, meaning they do not receive any tax benefit from their charitable contributions until the total of their taxes, interest and philanthropic contributions clear the $24,000 hurdle.

A higher standard deduction ($24,000) has provided a disincentive for Americans to contribute to their favorite charities because it is more challenging to realize the tax savings. It’s not impossible, however. Here are three strategies you can implement right away to lower your tax bill while supporting worthwhile causes.

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Donate Your Winners

Let’s say you bought one share of Amazon stock for the bargain price of $500 several years ago. It is now trading at over $2,000 per share. The investment gain is excellent news, but now you have a capital gain of $1,500 ($2,000 minus $500) that is waiting for you in the future.

If, because of the standard deduction threshold, you are unable to take a tax deduction for writing a $2,000 check to your preferred charity, you can donate your one share of Amazon stock instead. The organization receives the same $2,000, and you don’t have to pay any taxes on the gain, eliminating a $1,500 tax liability. By utilizing a strategy of donating appreciated investments, real tax savings can be achieved regardless of your income or deductions.

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Set Up a Donor-Advised Fund

What if your tax and interest deductions add up to only $10,000, far short of the $24,000 threshold you need to deduct a regular charitable contribution? Your $1,000 monthly donation to a non-profit now provides you with no tax benefit. This is where a donor-advised fund comes in.

With a donor-advised fund, you can contribute $24,000 to the fund this year and add the $24,000 contribution to the $10,000 you already have in taxes and interest, making your total itemized deductions $34,000. This strategy will significantly lower your tax bill for the current year!

The beauty of a donor-advised fund is that you can then instruct the fund to release $1,000 of the $24,000 every month to the non-profit, providing them with a steady two-year flow of money. In year two, when you don’t have more money to put into the fund, you still get the standard deduction of $24,000. You benefit immensely in year one and have no change in year two!

 Donor-advised funds can be complex to setup and you should consult with a Certified Financial Planner or tax professional if you are interested in learning more.

Qualified Charitable Distribution

Another way to realize tax savings on your donations is the Qualified Charitable Distribution (QCD). If you are over age 70½, you are eligible to make a distribution from your Traditional IRA directly to a qualified non-profit. Using this strategy, the money you take out of your IRA would have been taxable, but no longer is.

QCD’s are a great strategy, but be careful! The money can’t flow through your bank account first. It has to travel directly from your IRA custodian to the non-profit.

Every year Americans are paying more in taxes than they need to. By not correctly strategizing their charitable dollars, they are raising their tax bill. Your primary reason for giving may not be the tax savings, but that doesn’t mean you shouldn’t enjoy the fringe benefits of your generosity. If there is one cause we can all agree on, it’s lowering our tax bill as much as possible.

Reviewed March 2020

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