Enhancing Value of Your Charitable Contributions

You might recall that when the tax legislation was being debated, there was plenty of chatter around the risk that Congress would completely remove the deduction for charitable gifts. This Republican-backed proposition never made it into the final Tax Cuts + Jobs Act, but the tax changes could end up having a similar impact on plenty of taxpayers in different ways.

How? By doubling the standard deduction, the Tax Code will significantly lessen the amount of tax filers who itemize. Another portion of this new law reduces itemizing further by limiting the value of the deduction for state and local taxation to $10,000 — way under what many taxpayers in high-tax regions of the nation will pay.

The outcome? Historically, roughly 30% of people were itemizers. That amount is forecasted to fall to 10% before we begin filing this year’s taxes. Obviously, when you don’t itemize your deductions, you do not have the opportunity to deduct your charitable gifts.

Some quick math reveals how it works. Let us assume a married couple makes $14,000 in charitable contributions this year. The couple’s state and local tax deduction is capped at $10,000. Together, both add up to $24,000—which equals the new standard deduction. They receive no incremental deduction because of their $14,000 of charitable contributions.

How to proceed? One approach to overcoming the effect of the new tax provisions would be to package many year’s charitable contributions into an individual tax year — donating the greater sum to a donor-advised fund instead of the charity directly. If the same couple were to provide two years’ worth of contributions to a donor-advised fund that would be $28,000. Add the $10,000 maximum taken out for state and local taxes, and it most likely makes sense to itemize. The extra $14,000 (above the standard deduction) leads to the tax savings of approximately $5,180 for filers in the 37% tax bracket.

If the couple were to package five or ten years’ worth of charitable contributions into a single tax year, they would receive a large charitable deduction in one year and will use the standard deduction in subsequent years.

The donor-advised fund could then make annual gifts for many years. Ideally, donor-advised fund assets will appreciate (tax free) allowing for additional charitable contributions.