The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, significantly increased the standard deduction for individual taxpayers. The standard deduction is $12,000 for single filers and $24,000 for joint filers. As a result, many more taxpayers are utilizing the standard deduction rather than itemizing deductions. Consequently, you will not receive a tax benefit from charitable deductions in years you do not itemize deductions. This article will explore three strategies to maximize income tax benefits related to charitable donations.
The first strategy is to make direct charitable donations from an IRA. These donations are referred to as qualified charitable distributions (QCDs). QCDs allow taxpayers aged 70½ or older to make tax-free charitable donations directly from their IRAs. Individuals meeting the age requirement may exclude up to $100,000 of QCDs each year from their income. The QCDs count toward meeting required minimum distributions (RMDs) that must be distributed from IRAs once you reach age 70½. Note that QCDs are excluded from taxable income but you will not receive an income tax deduction for the charitable contribution on your federal income tax return.
So why would you prefer utilizing a QCD rather than receiving a distribution from your IRA and then writing a check to the charitable organization? Quite simply, making a QCD will likely reduce your income taxes. Those with limited itemized deductions will definitely benefit. Those receiving Social Security benefits may also see a reduction in the amount of those benefits subject to income tax.
The second strategy is to form a donor-advised fund. Unlike QCDs, anyone can open a donor-advised fund, as there are no age restrictions on its utilization. Contributing to a donor-advised fund will allow you to take a charitable donation deduction in the year(s) you contribute to the donor-advised fund. A donor-advised fund is an easy way to create a fund for future charitable donations while receiving a tax deduction in the current year. Since you control contributions to your donor advised fund, you can contribute amounts that enable you to itemize deductions in some years and take the standard deduction in other years. This will allow you to maximize the tax benefits of your charitable gifts.
A donor-advised fund is especially beneficial when appreciated marketable securities (stocks) are contributed to the fund. This is because the donation amount, for purposes of the charitable donation deduction, is the fair market value of the appreciated property. You also avoid paying capital gains tax on the appreciation in value of the securities. This can significantly reduce your income taxes.
A third strategy is to donate multiple years’ worth of donations to charities in a single year while foregoing donations in other years. This bunching strategy can be employed to optimize your use of itemized deductions and the standard deduction over a period of years. Donating appreciated marketable securities directly to a charitable organization can be especially advantageous, as the amount of the donation will be the fair market value of the marketable security. You also avoid capital gains tax on the appreciation in value of the security.
This article has discussed three possible means of maximizing income tax benefits related to charitable donations. To learn more about these options, and which strategy may be best for you, please consult with your tax and investment advisors.
Lastly, please consider making current and future gifts to the Owatonna Foundation. The Owatonna Foundation is your community foundation and is focused on preserving the past, building the present, and funding the future of Owatonna.