By Matthew Gaude & Shawn McGuire
Last year, the Tax Cuts & Jobs Act was all anyone could talk about. There was plenty of speculation about how the many adjustments would affect different aspects of our personal finances, but no one knew how it would all play out until the changes went into effect. Well, tax season is upon us, and there are changes in store for just about everyone.
One area the new tax law is affecting is charitable giving. While many people focus on the new, higher standard deduction and fear that it will have a negative impact on charitable giving, there are also provisions in the law that actually increase incentives to give. Here is an overview of how the new tax law is changing your tax filing experience and some of the options you should consider for your charitable giving.
Does It Matter If I Itemize?
Charitable giving is tax-deductible, but only if you itemize your deduction. When you take the standard deduction, your charitable giving has no effect on your taxes.
In 2017, the standard deduction for single tax filers was $6,350. Anyone with property and state taxes, interest payments, and charitable giving that totaled more than that would itemize to get a larger deduction. For 2018, the standard deduction for a single filer had almost doubled to $12,000. That means that a taxpayer needs to have over $12,000 worth of property and state taxes, interest payments, and charitable giving in order to receive any tax benefit from their donations.
The higher standard deduction means that fewer people will receive a tax benefit for their charitable giving because fewer people will itemize their deductions.
How Much Can I Deduct?
The new law also increases incentives for giving, particularly for high-income earners. Previously, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Under the new law, the limit has increased to 60% of AGI.
In addition, the new law repealed the Pease limitation. The Pease limitation was a rule that phased out as much as 80% of charitable and other itemized tax deductions for higher-income taxpayers. Now, high-income taxpayers are not limited in their total charitable deduction and can keep more of their itemized deduction.
How Can I Benefit From Charitable Giving?
How the law affects your own personal giving is based on whether you’re affected by the new standard deduction or by the increased giving limits. If it is the standard deduction, you may still be able to benefit from giving while also taking advantage of the higher standard deduction. You can do this by bunching your giving or doing several years’ worth of giving in one year.
For example, let’s say you are a single taxpayer who usually donates $6,000 a year and you have $5,000 worth of taxes and interest payments that are deductible. If you itemize, your deductions will total $11,000, which is less than the standard deduction. As such, you would take the standard deduction and miss out on the benefits of your charitable giving.
Instead, what if you bunched your giving and only made donations every other year? In year 1 you wouldn’t donate anything, so you would take the $12,000 standard deduction. In year 2, you would give double and be able to itemize for a deduction of $17,000. If you repeat this pattern every other year, then you will get an extra $5,000 of deductions every other year that wouldn’t be available to you if you gave yearly.
Another Option: Donor-Advised Funds
One way to take advantage of bunching your giving is through a donor-advised fund (DAF). These work just like charitable savings accounts. You put money into the fund and then distribute it to charities when and how you see fit. You get to take the charitable deduction when you fund the account, not when the money is actually given to charities.
With a DAF, you could contribute a large amount up front and take the deduction for it, and then distribute it to your charities over the following years.
What If I’m Already Retired?
If you are older than 70½ and have an IRA, you can bypass the bunching and itemizing and get an immediate tax benefit from all of your charitable giving. You can do this by making qualified charitable distributions (QCDs). A QCD is a donation made to charity straight from your IRA without having the money go to you first. Since you never lay your hands on the money, it does not count as taxable income to you.
With a QCD, you get the same tax advantage from your charitable contributions without having to itemize. It also lowers your taxable income, which increases your ability to qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. Also, a QCD can count toward your required minimum distributions. There are some restrictions for QCDs, so it is important to talk to a financial professional if you want to take advantage of this strategy.
Get The Most Out Of Your Giving
Now that tax season is here, we will finally see the real effects of the new tax law. No matter how it affects you, it doesn’t need to deter your generosity. You can still give back and receive tax benefits for it. If you want to know more about how to get the most out of your charitable giving or have any questions about the strategies mentioned here, the team at Live Oak Wealth Management is here to help! Give us a call at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule a complimentary introductory meeting today!
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
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