With tax reform changes in effect in 2018, deductions for charitable giving just got a bit more complicated. The increase in the standard deduction to $24,000 for Married Filing Joint returns and $12,000 for Single filers means that charitable donations might not result in a taxable deduction as they have in the past. That is because the sum of all itemized deductions on Schedule A of Form 1040 will need to exceed the $24,000 threshold before any extra tax benefit is realized. While the $24,000 is an increased benefit to most taxpayers, it makes traditional charitable giving less attractive tax-wise if a taxpayer is unlikely to exceed the standard deduction. However, there are a couple of options that can maximize the tax benefits of giving under the new tax regime.
For taxpayers that are at least 70 ½ years old and have IRA accounts, Qualified Charitable Distributions (QCD) from an IRA can be made direct to eligible charitable organizations. The QCD is excluded from gross income up to $100,000 per individual on an annual basis on taxable distributions. The QCD will count towards the taxpayer’s annual required minimum distribution. A QCD must be made direct from the IRA trustee to a qualified charitable organization. Private foundations and donor advised funds are not qualified for this purpose. Charitable donations through QCDs have an additional advantage over traditional cash giving because the exclusion of the QCD from income lowers the total income that is used in the calculation of other items such as taxable social security benefits, AGI limitations for itemized deductions, and income used in determining Medicare premiums.
Another option for maximizing charitable giving under the new tax rules is to utilize a Donor Advised Fund. Giving to a Donor Advised Fund means giving cash, securities, or other assets to an investment account under the control of a public charity where the donor retains a degree of influence over future distributions to charitable organizations. A contribution made under this giving vehicle results in an immediate tax deduction, subject to charitable giving limits of 60% of AGI and 30% of AGI for securities. A donor advised fund can be advantageous if a taxpayer is unlikely to exceed the $24,000 standard deduction each year because a gift of a substantial amount in any one year can maximize Schedule A itemized deductions while still retaining the ability to designate donations in future years. If appreciated securities are donated the taxpayer also avoids capital gains tax on the transfer of the securities.
If you have any questions on these charitable giving strategies, or there is something else we can assist you with, please contact your local tax experts at BA Harris LLP.
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