There have been many changes occurring because of the Coronavirus in recent weeks, including Tax Day. You now have until July 15th to file, with no interest or penalties.
As you prepare your taxes, we thought it would be helpful to review the changes made to charitable deductions because of the Tax Cuts and Jobs Act (TCJA).
The IRS allows you to take a tax deduction for your charitable contributions, and this can lower your taxable income as well as your tax bill. However, to get the full benefit, your donations and other itemized tax deductions would have to exceed the standard deduction amount for your filing status.
The Tax Cuts and Jobs Act (TCJA), which went into effect on Jan. 1, 2018, dramatically changed how charitable contributions are deducted. In 2019, the standard deduction was $12,200 (it will be $12,400 for 2020) for single taxpayers and $24,400 for married couples who file jointly (it will be $24,800 for 2020).
This major change has created new opportunities for multi-year tax planning depending on your taxable income before your charitable deduction.
Here are a few strategies that might be right for you:
Bunching. Rather than giving every year, you can give a greater amount every other year. Consider a married couple who has $18,000 in deductible expenses, which include $4,000 a year in charitable donations. Under the new tax law, they would be better off claiming the $24,000 standard deduction. But by making $8,000 gift every two years, raising their deductions to $26,000, they could get a write-off and still give the same amount.
Donor advised fund (DAF). If you prefer to make annual gifts, consider a donor-advised fund, which allows you to bunch and make frequent donations. Your entire contribution is deductible in the year you give, and you can spread out your donations to charities you choose in future years. DAFs are a great way to offset higher than normal income years. If you are exercising stock options, selling a property or business, receiving a large bonus or severance package, a larger donation to your DAF can help offset that income. DAFs are a great place for tax-free growth, potentially providing additional charitable support in the long run. It may sound confusing, but you can set up your own DAF fairly easily.
Donate appreciated assets. You can also donate stocks or other appreciated assets, such as artwork and antiques, which have grown in value. By giving appreciated stock you can avoid having to pay taxes on the capital gains that have accumulated over the years. When you assume 20% for federal long-term capital gains taxes, plus a 3.8% Medicare surtax, this leads to a potential increase of 23.8% of both your tax deduction and your charitable contribution.
Give a portion of your IRA withdrawals. One of the biggest tax breaks on giving is the Qualified Charitable Distribution (QCD), which provides tax benefits to older Americans who give to charity through withdrawals from their traditional IRAs. A QCD sends a check directly from your IRA to the qualifying charity of your choice. QCDs can be counted towards satisfying your required minimum distribution (RMD) and the amount donated will be excluded from your taxable income. The maximum annual amount that can qualify for a QCD is $100,000. QCDs do not require that you itemize, and given the recent tax law changes, allow you to take advantage of the higher standard deduction and your charitable giving.
As you consider your charitable donations, remember that they must be made to tax-exempt, 501(c)3 organizations to qualify as a deduction. A legitimate charitable organization will be happy to provide you with proof of its tax-exempt status, such as by producing its Form 990. Protect yourself so that you’re not taken in by scammers.
The IRS also provides a tool, Tax Exempt Organization Search, where you can confirm the status of a tax-exempt organization. Other online databases to check include GuideStar and Charity Navigator.
Be sure to keep a copy of all your receipts in case the IRS comes calling.
We are always happy to meet with you to discuss your individual goals and help you minimize your tax liability. Schedule a time with us today!
While we are familiar with the tax provisions of the issues presented here, as Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.
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