If you are charitably minded, you should be aware of changes under the recent Tax Cuts and Jobs Act that may change the way you give. Let me recognize the intangible benefits of giving, both to those receiving the funds and to the giver. However, another significant benefit of giving is the tax deduction associated with the gift. Under the new law, it may benefit you to concentrate your giving in some tax years to maximize the benefit of the gift.
First, it is important to understand why charitable gifts may not result in a tax benefit for 2018. The new tax law doubled the standard deduction to $24,000 for a married couple, which may mean that you receive a deduction whether you make that charitable gift or not. Remember that taxpayers are eligible to receive the greater of the standard deduction or the itemized deduction. Charitable gifts were and still are itemized deductions. Let’s look an example of a retired taxpayer with a paid off mortgage who gives $10,000 per year.
This taxpayer would receive the $24,000 Standard Deduction because it is higher than the total itemized deduction. Therefore, there is no benefit from the $10,000 charitable donation.
Concentrating gifts to a single year, however, could result in an even better outcome, resulting in a deduction for the charitable gift in the year of the gift and receiving the standard deduction in the years where no gift was made.
Here is an example of how this strategy would work over a 3-year cycle of giving:
In our basic example, concentrating giving to one year out of three would result in a $16,000 higher deduction, or tax savings of about $4,000 over the 3 years, significant savings even assuming a modest 25% Federal and State combined tax rate.
Of course, these charitable gifts could be made in year 3 if cash flow was an issue. Also, these charitable gifts could be made to a Donor Advised Fund, which would allow you to receive a deduction in the year the funds are gifted to the Donor Advised Fund, and then you could distribute the funds to charities over the 3-year period. (If you would like to learn more about Donor Advised Funds, please see our article here)
I hope you still give, even with the changes to the tax code. If you do give, consider concentrated giving to maximize your tax benefit. Of course, everyone’s situation is different. If you would like to discuss your situation, please give us a call.