Obtaining a significant tax benefit for charitable contributions may be a little harder after the Tax Cuts and Jobs Act of 2017 (TCJA), but it’s not impossible. Here’s a look at how the TCJA has altered the tax landscape for charitable giving and three strategies that could help taxpayers get better tax mileage from their donations going forward.
What Has Changed?
Because the deduction for charitable contributions is an itemized deduction, taxpayers who claim the standard deduction receive no deduction for their contributions. That much hasn’t changed. What has changed is that standard deductions for every filing status are significantly higher under the TCJA. And since there are new limits on some itemized deductions — e.g., the deduction for state and local taxes — and others have been outright eliminated, taxpayers are less likely to benefit from itemizing in the first place. But if they do, cash contributions are generally deductible up to 60% of adjusted gross income (AGI), versus the pre-TCJA limit of 50% of AGI.1
Timing Donations With a Donor-Advised Fund
With a donor-advised fund, you make a contribution (or series of contributions) to the fund and recommend how you would like your gifts to be disbursed. Generally, the donor’s recommendations will be followed, but the sponsoring organization has the final say as to how the money is actually distributed.
Contributions to a donor-advised fund are generally tax deductible in the year they are made. So funding a donor-advised fund in a year you expect to itemize your deductions could provide a tax advantage. If desired, you could then put those dollars to use over several years by supporting your favorite charities through your donor-advised fund.
Donating Appreciated Securities
Many donor-advised funds and other public charities accept contributions of publicly traded stock or other securities. A donation of highly appreciated securities held more than one year provides a potential tax deduction for the securities’ fair market value while also avoiding the capital gains tax that would be due if the securities were sold. Note that itemized deductions for contributions of appreciated securities are generally limited to 30% of AGI.1
Making QCDs After Age 70½
A qualified charitable distribution (QCD), also known as an IRA charitable rollover, allows you to donate to qualified charities directly from your individual retirement account (IRA). While there is no tax deduction allowed for the donated assets, they don’t count as income either. What’s more, a QCD can help satisfy your annual required minimum distribution (RMD).
To make a QCD you must be at least 70½ years of age. Gifts must be made directly from your traditional or Roth IRA to a public charity. (Contributions to donor-advised funds are not eligible.) Up to $100,000 may be transferred annually.
Before implementing any tax planning strategy, be sure to discuss it with your tax advisor. Each individual’s tax situation is different, and your tax advisor can help you analyze the impact on your personal situation.
1Technically, the percentage limit is applied to a taxpayer’s “contribution base.” Contribution base is AGI but without deducting any net operating loss carryback to that year.