Americans are still trying to understand the magnitude of changes from the 1101 page Tax Cuts and Jobs Act and how it will impact their income taxes.  Less than 10% of individuals are expected to itemize deductions in 2018, down from almost 30% in prior years.  For those who have itemized in the past and counted on a deduction for charitable contributions, this may be a rude awakening.

With the proper planning, there are still some ways to continue to support your charities and get a preferential tax treatment.  Here are our top picks:

Option 1: Qualified Charitable Distribution

If you are currently at least 70 ½ and taking a Required Minimum Distribution from an IRA or Inherited IRA, you can get a tax break for charitable contributions made directly from your IRA account.  A “Qualified Charitable Distribution” (QCD) allows you to distribute up to $100,000 per year from an IRA directly to a qualified charity.  A QCD distribution will count towards the RMD requirement and is excluded from taxable income, thus reducing your taxes without the itemized deduction.

Option 2: Charitable Lumping

Lumping or “bunching” itemized deductions is a strategy to consider if you are close to the threshold ($12,000 for individuals and $24,000 if married filing jointly) where your itemized deductions would exceed the Standard Deduction.  For example, you could make a multi-year charitable contribution one year into a charity (e.g. your church pledge or other charity of your choice).  The charity gets the immediate benefit of the larger donation and you may take advantage of the itemized deduction in the year donated.

Option 3: Charitable Trusts

Charitable remainder trusts can be a viable option for those who have sufficient assets. In a charitable remainder trust the donor gets an income tax deduction at the time of the transfer, retains an income stream from the assets, avoids capital gains on the gifted assets, and removes the property from his gross estate.  Since CRATs and CRUTs are typically of substantial size ($500,000 or more) they are likely to exceed the Standard Deduction threshold.  In fact, the new Tax Cuts and Jobs Act actually raised the limit on charitable contributions from 50% of adjusted gross income to 60% which certainly benefits larger donors.

Option 4: Donate Appreciated Assets

Appreciated assets have always been a double-edged sword as far as taxes are concerned.  It is great to see the value of your stocks (or art or real estate) go up, but when sold the realized gains are taxed.  High-income taxpayers should always consider a non-cash donation of appreciated assets whenever possible.  The donation is valued at fair market value, the charity can sell the assets without paying the capital gains tax and you have the opportunity of reducing your exposure to an asset without tax consequence.

Option 5: Donor Advised Funds

Donor advised funds marries the charitable lumping and appreciated assets options in a very accessible way.  An individual typically gifts appreciated securities to a donor advised account, whereby they are eligible for an immediate tax deduction.  The securities are sold without tax consequences to the donor by the financial institution.  The donor then recommends grants from their account to any IRS qualified public charity of their choice.  These grants can occur over a multi-year period even though the donation was made in a single year.  Unlike Charitable Remainder Trusts, the minimum donation is quite low ($5000 generally) so they can have more widespread use.

Want to learn more?  Give us a call to discuss which option might be right for you.