If you’re planning to give to charity now, you may want to adjust your charitable giving strategy to align with the new tax law so that you and your charities of choice receive the most benefit.
While the Tax Cuts and Jobs Act preserves the charitable deduction, it increased the standard deduction to $12,000 for individuals and to $24,000 for married couples filing jointly. The implications? For many taxpayers, it may no longer make sense to itemize their deductions—and that may impact how they decide to handle their charitable giving.
That said, tax-advantaged ways of giving still exist, and tax reform has created some new opportunities for charitable giving, especially for large donors, says Jeff McClean, Wealth Advisor for Wells Fargo Private Bank. The law increased the deduction limit for cash contributions to charity from 50 percent to 60 percent of your adjusted gross income. In addition, the new code repeals the Pease limitation, which capped itemized deductions for high-net-worth taxpayers.
“If you’re a big donor, you can actually give more now than you could in the past,” McClean says.
The strategies outlined here can help enhance potential tax benefits for your generosity while you continue to support the charities you care about.
1. Bunch your contributions into a single year.
“Bunching” involves combining several years’ worth of charitable contributions into one year. An individual can make a single contribution of cash or securities to a charity or charitable vehicle such as a donor advised fund to cover several years of planned giving, McClean explains. For example, instead of giving $3,000 a year over four years to charities directly, you could give $12,000 to a donor-advised fund one year. If you’re a single filer, you would take the itemized deduction the year you make the contribution; the fund would make grants to your designated charities over the next several years while you take the standard deduction.
2. Give through your IRA to get a tax break even if you don’t itemize.
If you’re age 70 1/2 or older and need to take required minimum distributions from your traditional and/or inherited IRA, you can transfer up to $100,000 a year from your IRA directly to a qualified charity of your choice with no federal income tax consequences, says Bill Bardwell, Philanthropic Solutions Strategist at Wells Fargo Private Bank. Called qualified charitable distributions (QCD) or IRA charitable rollovers, they can lower both your adjusted gross income and your taxable income, so your overall tax liability is lower. “You can have your IRA custodian send your QCD over to the charity, and there is no special income-related reporting involved; however, you will receive a 1099-R for the distribution,” Bardwell says.
If you are considering a QCD, Bardwell offers these important caveats: “Qualified charitable distributions are not includible in a donor’s gross income. For that reason, they do not qualify for a charitable contribution deduction, and you cannot donate a QCD to a donor advised fund, to certain private foundations, or to split-interest arrangements, such as charitable remainder trusts, charitable lead trusts, or charitable gift annuities.”
In addition, the rollover has to be given without gaining anything in return from the charity. “If a donor accepts anything of value—whether that is a $50 ticket or a lifetime pass to a museum—as a result of their qualified charitable distribution, the entire distribution may become taxable income to them.”
3. Make charitable contributions from your C corporation.
If you own a C corporation, you may want to investigate charitable giving through your business. This can be a viable option if you are not planning to itemize on your personal return, McClean says, because your business can still take the tax deduction. Corporate contributions also come with the side benefit that your business name will be positively associated with the donation.
Corporations are limited to deducting no more than 10 percent of their taxable income for the tax year, but they can carry forward the excess for five years. Keep in mind that you can’t use this strategy if you own a pass-through corporation, such as an S corporation, an LLC, or a partnership. For more, see “Tax Reform and Your Business: Is It Time to Reclassify?”
4. Reassess season-ticket donations.
Under the 2017 tax reform, you can no longer take a charitable deduction for gifts to universities that give you the right to purchase tickets or seating at events. (Previously, there was an 80 percent deduction.) If you’ve made that type of donation in the past and you plan on itemizing, McClean recommends contacting the university to discuss alternative ways to donate that would still qualify for a deduction. “Many universities are rethinking their policies around seating rights, so you want to find out what options are available,” he says.