The Tax Cuts and Jobs Act of 2017 (TCJA) represents the most sweeping tax legislation that has occurred in the last 30 years. While the rules surrounding the charitable deduction remain largely intact, several other provisions of the TCJA will make it more difficult for many individuals to take advantage of the deduction; however, with careful planning, taxpayers should still be able to achieve their philanthropic goals while realizing tax savings.
The TCJA introduced a significant increase in the amount of the standard deduction, nearly doubling it for both single and married filing jointly filers. In addition, several changes to itemized deductions were implemented under the new law, one of the most significant being a $10,000 combined cap on the deductions for state and local income taxes and property taxes, as well as tighter limits on mortgage interest deductions, and the suspension of miscellaneous deductions subject to the 2% Adjusted Gross Income (AGI) limitation.
As a result of these changes, it’s expected that far fewer taxpayers will be able to take advantage of itemized deductions. However, with the right planning, charitable contributions can continue to provide the tax benefits that were enjoyed by taxpayers pre-TCJA.
For individual taxpayers, the question then becomes, “What types of tax planning opportunities should be considered in the pursuit of my philanthropic goals?”
One planning strategy that could allow individuals to continue to donate and receive tax benefits is to “time” their donations and “bundle” contributions into a single year while limiting contributions in other years. For instance, if a taxpayers’ “typical” annual donations are $2,000, grouping three years’ worth of giving into a single year totaling $6,000 will increase the likelihood that they will be able to itemize when combined with the other itemized deductions that cannot typically be timed (subject to the applicable AGI limits), such as state and local income taxes, mortgage interest, and property taxes. Assuming the taxpayers exceed the standard deduction in the “bundling” years, they would take advantage of itemizing every third year, while claiming the standard deduction for each year in between.
Also, those charitably inclined taxpayers 70 ½ years of age or older with IRAs, may wish to consider reducing or eliminating the impact of income recognized from required minimum distributions (RMDs) by making a qualified charitable distribution (QCD). A QCD is a direct transfer of funds from an IRA custodian to a qualified organization of the taxpayers’ choice. QCDs count towards satisfying the RMD for the year, up to $100,000, and are generally excluded from taxable income. Thus, if a taxpayer’s annual RMD is $9,000 and he or she makes a $6,000 QCD, only $3,000 would typically be included in taxable income. Also, as the QCD is not considered a charitable contribution, a taxpayer can take advantage of the increased standard deduction, while still getting the tax benefit of the QCD.
Finally, for itemizing taxpayers holding appreciated, long-term capital gain property, donating this appreciated property instead of donating cash may result in additional tax savings by eliminating the capital gains tax that would result if the property was first sold, subject to the applicable AGI limits.
Again, while the TCJA made the world of charitable giving a bit more complex, with proper planning, taxpayers can still receive tax benefits while accomplishing their philanthropic goals.
The information provided in this communication is only a general summary and is being distributed with the understanding that Grapp Lerash LLC, is not providing legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. For further discussion, contact a Grapp Lerash advisor today.