Deduction strategies will be different.
The U.S. is the most charitable nation on earth.
Is that because we are truly altruistic or is it because of the tax deduction offered to most taxpayers? With the recent federal tax changes, we will find some clues about the charitable intent of Americans.
In the new tax act, married couples will get a standard deduction of $24,000. For single taxpayers, it will be $12,000. What this means is that every taxpayer will receive this deduction whether they have any itemized deductions or not. This is wonderful for those without a mortgage or itemized deductions such as charitable contributions.
But those who have been charitable in the past, going forward, may not benefit from the tax deduction they once enjoyed unless it exceeds standard deduction.
A few opportunities may exist to get the most deduction for your charitable contributions. One concept is to bunch your deductions. Bunching means to make your contributions in greater quantity, but likely with less frequency. For example, if your standard charitable contribution is about $10,000 per year, and you have no other itemized deductions, you’ll be unlikely to get a tax deduction for that contribution.
But if you hold off in any given year, and double your contribution next year, you may have an easier time exceeding the $12,000 or $24,000 standard deduction amount and actually receive a tax benefit for the contribution. The charity probably won’t like the plan – it may make day to day operations difficult if their cash flow suddenly changed. But this can restore some of the tax benefit that you are accustomed to enjoying.
Another option is to use a charitable gift trust. In a charitable gift trust, you can make contributions to an account sponsored by a financial institution that qualifies as a charitable contribution. The donated funds then sit in that account until you direct the institution to disburse the funds to your charity of choice. You must distribute at least 5 percent of the charitable gift trust each year, thus enabling you to continuously fund the charity of your choice without interrupting their business operations or cash flow.
Careful financial forecasting is a good idea to maximize your contribution. You probably wouldn’t be very happy to write a large check now to find out that there was no tax benefit later.
One last option pertains to those of you over age 70½ who are forced to take distributions from your retirement account. The tax law still permits you to direct some – up to $100,000 – of your retirement distributions, including required minimums, directly to a charity. This avoids the distribution being counted as income and the charity gets the money. This is actually much better than taking the income and then making a deductible contribution.
As always, this tax act is far from simple. It has added complexities that tax professionals have never seen. Get help, and do not assume that things are business as usual.