In this post we'll discuss how to maximize your charitable giving deduction in view of the new tax law.
The new tax law increases the standard deduction for individuals and married couples filing a joint tax return. As a result, there will be fewer taxpayers itemizing their deductions. This means that many taxpayers will no longer receive a tax saving from charitable contributions.
Besides itemizing your state and local taxes (limited to $10,000 per year) and your home mortgage, the most significant deduction will be charitable donations. If the combination of these deductions does not exceed the standard deduction, the taxpayers will not itemize.
Therefore, we need to look at how a taxpayer can benefit from making charitable contributions. Below are three strategies for your tax planning.
1. Combine Your Charitable Donations
If a person is borderline itemizing, they can time their deductions in order to itemize every other year.
For example, you can make your contribution for 2018 in 2018, and if you are planning on making a charitable contribution for 2019, pay it or put it on a credit card by December 31, 2018.
By doing this, you would actually be deducting charitable contributions relating to two years all in one year (2018). In 2019, since you would not have a deductible contribution, you would take the standard deduction.
This is known as “bunching” all your deductions in one year. This technique can also work with medical deductions.
2. Contribute with Appreciated Property
If you make your contributions with appreciated property, you will get the benefit of a charitable deduction at the fair market value of the property contributed while not having to pay any capital gains tax on the difference between the cost of the property and its fair market value.
For example, let’s assume you purchased Intel stock for $1,000, and at the time of contribution it is worth $10,000. If you donate the stock to charity, you will get a $10,000 charitable deduction, but will not have to pay the tax on $9,000 of stock appreciation.
3. Contribute from Your Retirement Account
If you are over 70 ½, you are allowed to make direct contributions of up to $100,000 from your Individual Retirement Account and these contributions will not be taxable. However, you will not get a charitable deduction.
The benefit of utilizing this strategy is that if you do not itemize, you will still receive a benefit because the “distribution” is not taxed to you. This strategy is called IRA checkwriting.
In addition, by making the contribution direct, your adjusted gross income will not increase since the distribution is not part of your income. By not taxing the IRA distribution other areas may benefit as well.
Items that could be affected by not having to report this income are: (a) the amount of social security benefits that are taxable, (b) the amount of deductible passive losses allowed, and (c) if you itemize, the amount of deductible medical expenses due to the 7.5% threshold.
Need Tax Help Help Beyond Charitable Donations?
Charitable giving is just one of the many changes to the new tax law. We are offering a free 30-minute consultation to review your situation and make sure you are taking advantage of all the new changes.
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Good article. A couple other things could be mentioned.
In some states (e.g., MD), one cannot itemize on the state return unless one itemizes on the Federal. Since MD’s standard deduction is pathetic, one will often want to itemize on his Federal return even if the deductions are a bit less than the standard deduction since the extra amount of Federal tax due can often be more than offset by the savings from being able to itemize on the state return.
Another benefit from contributing RMD’s from one’s retirement account &, thus, lowering one’s taxable income is that the cost of Medicare Part B is means tested. Thus, such a contribution could get one’s income below the next threshold level, resulting in lower premiums being owed for Medicare Part B.
These are great points! Thank you for your comments.
Itemizing vs. Standard
When planning and preparing tax returns we always look to minimizing the total tax liability (Federal plus State). There will be times when the state savings by itemizing is higher than the Federal cost of itemizing. This strategy is good and one we always check, but might be a little too technical for the average reader to calculate the break even point. We are also monitoring the state law reaction to the Federal changes.
Medicare Part B premium is affected
This is also an ancillary benefit that may benefit certain taxpayers. Thank you for pointing that out!