The end of the year is giving season, but tax reform has changed the rules for charitable contributions. Many donors won’t receive the same tax breaks like in years past. However, there are two giving options available that will allow some donors to preserve those charitable tax deductions.
What tax rules changed for donors
Perhaps, the most notable change from last year’s Tax Cuts and Jobs Act was the increase to the standard deduction.
Under the new tax law, the standard deduction for a single taxpayer increased from $6,350 to $12,000. For married taxpayers, the standard deduction is now $24,000, up from $12,700.
Things people once itemized, such as property taxes and charitable contributions, may not add up to exceed the higher standard deduction thresholds. Therefore, more people will be using the new higher standard deductions and will not be able to claim separate deductions for their charitable gifts.
Nevertheless, some donors can still keep those tax breaks through qualified charitable distributions or donor-advised funds.
Qualified charitable distributions
A qualified charitable distribution allows IRA owners who are age 70 ½ or older to transfer up to $100,000 a year directly from their IRA to charity tax-free. That transfer is excluded from the IRA owner’s income and, if done correctly, counts toward the owner’s required minimum distribution (RMD). Simply put: you can fulfill part or all of your RMD and get an indirect deduction by avoiding taxes in the first place.
The key is that the distribution is directly transferred to the charity. That means, if the IRA custodian makes a check payable to the IRA owner who then endorses the check to a charity, it is not qualified. Further, your chosen charities must be registered as eligible 501(c)(3) organizations.
High-income earners who are younger than age 70 ½ and those with appreciated assets in non-IRA accounts may want to consider contributing to a donor-advised fund (DAF).
A DAF is similar to an IRA or brokerage account in that you invest money in the account. You then make contributions to your charities of choice as usual but with the money from the DAF. It can be funded with cash and/or securities. Since the DAF itself is considered a charity, the taxpayer gets to include the entire contribution on their Schedule A, the income tax form used by taxpayers to report itemized deductions.
Therefore, a DAF lets you bundle multiple years of charitable deductions at once to help you surpass the standard deduction threshold. An even greater benefit is derived from funding it with appreciated securities, as those earnings will never be taxed since the investments were donated.
It’s important to recognize that these are more complex ways to make charitable gifts. They won’t make sense for all donors. Further, you should work with a financial adviser to ensure you implement them properly and maximize your tax deductions.