With the sweeping tax law changes enacted in December of 2017 comes the opportunity for advisors to discuss some good news with those clients who are charitably-minded. The charitable deduction was the only widely-used deduction that was not limited, and in some instances the benefits of making charitable gifts were expanded.
Jerri Hammer--CFT Advisory Council Member and Armanino, L.L.P. Tax Partner explains:
“For 2018–2025, the deduction for cash donations to public charities is raised to 60% of AGI from 50%. In addition, the 3% haircut on itemized deductions has been eliminated. Once the standard deduction has been exceeded with itemized deductions, there is no further erosion of these deductions including charitable contributions. Also, keep in mind that you must itemize to benefit from the charitable contributions deduction. A bunchingstrategy might be helpful to maximize this deduction.”
Charitable Deduction Bunching Using a Donor-Advised Fund
“Say Client A is married and in the highest income tax bracket for 2018. She and her spouse own their home outright, with no mortgage. Their annual property taxes are $12,000, and they typically give $10,000 each year directly to their church. Under the new law, she and her husband would be entitledto a $24,000 standard deduction in lieu of reporting itemized deductions, such as medical expenses, real property taxes and charitable contributions. If she follows her usual practice of paying the property taxes and making the church contribution in December of 2018, her actual itemized deductions would total $20,000. (Her property tax deduction is capped at $10,000 under the new law, but there is no cap on charitable deductions, so $10,000 property taxes allowable + $10,000 actual charitable contributions = $20,000). This is lower than the standard deduction of $24,000 allowed to married couples filing jointly, so they would report the $24,000 standard deduction in lieu of itemizing for 2018. If they are in the 37% marginal income tax bracket, the standard deduction reduces their tax by .37 x 24,000 = $8,880.
Say, instead, Client A chooses to bunch her charitable deductions as a savvy tax savings strategy. In 2018 she socks away not only her 2018 church contribution but also her 2019 contribution into her donor-advised fund (DAF) with Communities Foundation of Texas (CFT), for a total of $20,000. Her property tax deduction is limited to $10,000 under the new law, but there is no similar limitation on the charitable contributions. Therefore, her itemized deductions total the $10,000 in property taxes allowed plus the $20,000 donated to the DAF, or $30,000 total. At 37%, the $30,000 deduction saves her $11,100 in tax. This is $2,220 more than the tax savings from the standard deduction, which was $8,880. That’s $2,220 more in Client A’s pocket due to taking advantage of the bunching strategy.
In 2019, she and her husband make no additional charitable contributions personally, but they still benefit from the $24,000 standard deduction that year. Bunching produces a win for them in 2018 with no loss in 2019. They could bunch their charitable contributions again in 2020 (their next “on” year), make no additional contributions in 2021 (their next “off” year), and so on from there.
Advantages of the technique Using the DAF, an individual or couple can choose the year they make their charitable grants in order to minimize their tax liability, while retaining flexibility on the timing of the grants from the DAF to their charities. They can now give the $20,000 salted away in their DAF at their leisure, either in small, or larger, more impactful amounts. The income earned by the invested DAF funds is not subject to income tax and is available to fund even more charitable donations. Furthermore, this technique becomes even more tax-efficient if they are able to fund their gift to the DAF using long-term appreciated marketable securities, because they will be able to avoid paying the capital gains tax on the appreciation on those securities in addition to enjoying a full fair market value deduction for the gift (perhaps subject to some income limitations).” Click to read full article on changes for individualandbusinesstaxpayers.
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