Charitable Giving in 2018Submitted by Karstens Investments on October 26th, 2018
By Steve Olafson, CFP
Charitable giving should be driven by the desire to do good for others. However as financial advisors, it is part of our job to see if there are any financial benefits in doing so. Prior to 2018, it was pretty simple to get a tax deduction by itemizing. Because of the new Tax Cuts and Jobs Act, that hurdle is a little harder to clear with the higher standard deduction. Under the legislation, an individual will need total itemized deductions to exceed $12,000, the bill’s new standard deduction for individual taxpayers, up from $6,350. Married couples will need deductions exceeding $24,000, up from $12,700. A report released earlier in the year estimates that nearly 30 million fewer households will itemize deductions this year due to the tax reform. Simply put, most people will lose the tax benefit associated with charitable giving without being able to itemize.
Despite the changes, there may still be ways for charitable donors to get a tax benefit. When it comes to deductions, you may have heard of the term “bunching”. Rather than give the same amount each year, try giving a greater amount every other year. If you gift $5,000 to charities each year, consider bunching by giving $10,000 every two years. By doing so you may be able to itemize one year, and then take the standard deduction the next year.
Another option is to set up a donor advised fund or account through a foundation like Omaha Community Foundation. Since the foundation itself is a 501c3 organization, you get the tax deduction at the time of the transfer into your account. You can then choose when to make individual grants to the charitable recipients of your choice. An added perk is that you can gift appreciated stock from your taxable investment account directly to Omaha Community Foundation and in doing so you pass along the capital gains.
Lastly, there is the qualified charitable distribution (QCD) which is a transfer of funds directly from your IRA to a qualifying charity. With a QCD you do not take a tax deduction. Instead, the amount transferred from the IRA is not taxed as ordinary income and it counts toward your required minimum distribution. Excluding this amount from income is a better tax benefit than receiving a tax deduction, because it keeps income lower. This allows for more AGI–based tax benefits, resulting in a lower tax.
There are a few rules and limitations to be aware of with the QCD. First, it is limited to traditional IRA or inherited IRA owners who are at least age 70.5. A QCD cannot be made to donor advised funds or private foundations and the donor cannot receive anything in return for the QCD. The annual limit is $100,000 per person. The IRA custodian does not do any special tax reporting of your QCD. They simply report the total amount of your distributions for the year on the 1099. You will want to inform your tax preparer to ensure the QCD is properly noted.
If you have any questions or would like to discuss these ideas in greater detail, please give us a call. As with any tax scenario, we recommend consulting your accountant to see how these strategies specifically fit in your personal situation.