As an individual taxpayer, due to the large scale changes triggered by the Tax Cuts and Jobs Act ("TCJA"), you'll need to plan more carefully to ensure you reap all possible tax benefits. While the TCJA's individual tax provisions increase the tax benefits for some taxpayers, limitations to itemized deductions could result in others paying more. Proper tax planning can help - particularly when it comes to maximizing the tax benefits related to charitable donations.
Bunching Charitable Donations
“Bunching” of charitable donations is a tax strategy you may want to consider. Generally, bunching means grouping your anticipated charitable donations for a future period into a single year to ensure you receive the greatest benefit. For example, assume you are a married couple filing a joint return. You reach the maximum deduction of $10,000 for your real estate and state and local income taxes, you have $6,500 of mortgage interest, and you have $5,000 of charitable donations in 2018. Your total itemized deductions would be $21,500. Since the standard deduction for those filing jointly is $24,000, you would use the higher standard deduction when calculating your tax. In this scenario, you would receive no tax benefit for the $5,000 of charitable contributions since with or without them, you would get the standard deduction. However, assuming you were to bunch three years of charitable contributions into 2018, the $15,000 of charitable donations would create total itemized deductions of $31,500, which is higher than the standard deduction. This strategy helps to ensure that your charitable contributions are not lost.
Donor Advised Fund
For many, the desire to support a specific charity, rather than the tax deduction, drives their donating activity. Suppose you used the bunching method and later find a charity you would like to support. If you are interested in grouping future charitable donations into one year, you may be forced to make decisions about what charities are right for you earlier than you would like. The use of a donor advised fund (“DAF”) can help in this situation.
A DAF is a charitable giving vehicle that allows taxpayers to make a contribution in one year, receive a charitable deduction for that contribution, and then make recommendations in later years as to how the funds should be distributed. Over future years, this allows the taxpayer to make decisions about which charities to support as philanthropic initiatives change. The DAF can hold your charitable funds for later distributions, while giving you an immediate tax deduction in the year you contribute.
TCJA also increased the limit for cash gifts to public charities and certain private foundations from 50% to 60% of the taxpayer’s adjusted gross income (“AGI”). Any excess contributions will be carried forward up to five years. If you plan to use the standard deduction after the year of bunching, be careful that the “bunching” donations do not exceed the 60% cash contribution limit. Otherwise, you may lose the donations that get carried into future years.
In addition, most of the TCJA individual tax provisions will expire at the end of 2025. Therefore, while planning for your charitable donations, individual circumstances must be taken into consideration and tax projections must be run in order to account for future changes.
For further guidance on how to maximize the tax benefit of your charitable donations, please contact your Friedman LLP tax professional.