Loss of itemized deductions and donations to charity

Strategies to maximize your tax benefits

Pamela Wheeler, EA, estate tax, gift tax, estate planning

Pamela Wheeler, EA

With the Tax Cuts and Jobs Act (TCJA) now in effect for the 2018 filing season, the number of taxpayers who will report income tax savings on their tax returns from charitable donations is projected to drop from 37 million in 2017 to just 16 million in 2018. It’s estimated that fewer than 10% of taxpayers are expected to itemize their deductions in 2018.

This decline is primarily due to two changes in the TCJA: 1) The itemized deduction for state and local taxes is limited to $10,000 per return ($5,000 for married taxpayers filing separately) and 2) The increase in the standard deduction to $12,000 for single returns, $24,000 for married joint returns and $18,000 for head-of-household returns. The standard deduction is even higher for individuals who are over age 65 or blind.

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So, even though the TCJA didn’t limit charitable deductions, the increase in the standard deduction may mean less incentive for taxpayers to donate. Will you be as motivated to donate to a charity if your contribution will not reduce your income tax? The question you need to ask yourself is why do I donate? When you think about it, donating to a charity is probably an emotional decision, while the “what” to donate and the “how” to donate are more tied to logic. If your emotions tell you to continue to donate to charity, there are some logical strategies you can employ to help you maximize the “what” and the “how” and still realize some income tax benefit.

Stacking or lumping charitable donations

This may be an effective charitable strategy for 2018 and beyond. You can stack or lump all the charitable dollars you would normally donate over the course of several years into one year, contributing the combined amount to charity, or to a donor advised fund. For example, if you normally give a total of $5,000 to various charities each year, you could donate five or 10 years’ worth of contributions – so $25,000 or $50,000 – in one year to maximize your deduction into that year. Making the large contribution to a donor advised fund provides the option of later directing the money through grants to the charitable organizations of your choice, distributing the funds over several years. You can also use this strategy for pledges. The IRS now allows donor advised funds to satisfy legally binding pledges.

Note: Stacking or lumping your donations can be especially effective if done in a year where you might have substantial deductible medical expenses.

Publicly traded stock

What if you don’t have the cash available to combine years of donations into one? Perhaps you have publicly traded stock in your portfolio you could donate to a charity or to your donor advised fund? Better yet, donate stock with a low-cost basis. Contributing long-term appreciated securities to a charity allows you to deduct the fair market value of the stock and avoid recognizing the capital gain on the transaction.

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Note: There are limitations on the total charitable contributions that can be deducted above specific adjusted gross income (AGI) thresholds, so be sure to consult your accountant before committing to large cash or capital gain property charitable donations.

Individual retirement accounts

The TCJA did not make any changes to the law that lets taxpayers over the age of 70 ½ make charitable gifts of up to $100,000 from an individual retirement account (IRA). So, another great strategy if you’re over 70 ½ is to make qualified charitable distributions (QCDs) directly from your IRA, giving you an even greater tax benefit because the dollars donated from your IRA to charity are not included in your AGI. A bonus is that QCDs go toward satisfying your required minimum distribution (RMD) for the year. Bear in mind though, QCDs must come from an IRA; they cannot come from a 401(k).

If you are over age 70 ½, have an IRA, and can no longer itemize your deductions, you should consider making all your charitable donations from your IRA account. The primary obstacle: making numerous small gifts – for example, $20 or $50 from your IRA. One practical solution is an “IRA checkbook” offered at some of the brokerage houses. Each check is a distribution from your IRA, so you can write an IRA check for any dollar amount, mail it to the charity and alleviate the IRA custodian’s administrative burden of issuing numerous small checks.

Time will tell how the loss of itemized deductions will reduce donations to our nation’s charities, but if your emotions continue to inspire you to donate, there are some valuable strategies you can employ now to maximize your income tax savings.

Pamela Wheeler, EA, MST, CSEP, specializes in the taxation of trusts, estates and individuals. She can be reached at (480) 483-1170 or PamelaW@hhcpa.com.