This time of year we’re contacted by the charities we support for more help, and this year the requests seem a little more urgent.
Non-profits are concerned there will be a decline in charitable donations due to the changes made by the Tax Cuts and Jobs Act of 2017 that go into effect this year. With increases in the individual and joint standard deduction, and limitations placed on itemized deductions, many taxpayers may not itemize and therefore lose the tax benefit of giving. In Cincinnati, the United Way’s 2018 campaign fell short by about 20%, and earlier in the year the Association of Fundraising Professionals published a first-quarter report showing the number of new charitable donors down 12% versus the prior year. The full impact won’t be known until next year.
Like many of you, I believe charitable giving is important to do regardless of the tax benefits, but as your financial advisors we here at TAAG also want to be sure you know the best ways to give and what you should consider as you determine how much and when to make your gifts.
Cash vs. Highly Appreciated Assets
Writing a check is less tax-efficient than gifting shares of a stock or mutual fund to a charity. Because qualified charities pay no capital gains taxes on the sale of securities, a gift of shares benefits them the same way a cash gift would, but you avoid the taxes you would have to pay if you sold the shares yourself.
Many churches, community organizations and other non-profits are knowledgeable about receiving stock or mutual fund gifts and have brokerage accounts established with companies like Fidelity or Charles Schwab, so they can receive gifts of this kind. Here at TAAG we help our clients transfer gifts from their accounts to charities, and follow-up with the receiving charities to make sure the shares were received and the client is recognized for the gift.
Qualified Charitable Distributions
For those over age 70 ½ who must take Required Minimum Distributions (RMD) from their IRAs and other retirement accounts, a Qualified Charitable Distribution (QCD) is another tax-efficient way to gift.
QCDs are distributions from your retirement accounts that are not reportable as income to you. Rather than taking funds from your retirement accounts, paying income tax on the distribution, and gifting cash to your charities, you can skip the taxable step and have the distribution go directly to the charity or charities of your choice. The gifts are not deductible as a charitable contribution, but not reporting the income may be a greater benefit to you.
If you’re in a borderline tax bracket, reducing your income by the amount you would have to report from your RMD could keep you from jumping into a much higher tax bracket. Under the new 2018 tax rates and brackets, a married couple filing jointly jumps from the 12% to the 22% marginal tax bracket when their income climbs over $77,400 and from 24% to 32% when it goes over $315,000.
Your monthly Medicare part B premium is based on your modified adjusted gross income, and a QCD will impact those premiums as well. Your premium each year is based on your tax return filed two years earlier, so a reduction in your reportable 2018 income will impact the premiums you pay in 2020. A married couple filing jointly will pay $135.50 a month in 2019 if their reportable income is $85,000 or less vs. $352.20 a month if their reportable income is over $267,000, for example.
QCDs are not limited to your Required Minimum Distribution total either. The IRS will allow you to make a QCD up to $100,000 in any one year, which will also impact your future Required Minimum Distributions, since the RMD amount for each year is based on a formula that uses the prior year’s December 31st value of your accounts and your age.
Itemizing and Timing
The timing of your charitable gifts can also make an impact on your finances. While most individuals and couples who own a home have always itemized their deductions in years past, the Tax Cuts and Jobs Act of 2017 (TCJA) limitations may change that assumption. If you filed a Schedule A last year to itemize your deductions and your total deductions were over $12,000 as a single filer or $24,000 as a married couple, it may still benefit you to itemize, or it may benefit you do so only every other year or so. A look at your Schedule A from your 2017 1040 return may help you decide (page 3 of your 1040 return):
Medical & Dental – The first itemized deduction category on Schedule A is medical and dental expenses. Most taxpayers rarely have medical expenses that exceed 7.5% of their adjusted gross income (line 37 on page one of your 1040 return) unless they have a major medical event, therefore this deduction is rarely used.
Taxes You Paid – This is where the major changes take place for 2018. State and local income taxes and real estate taxes are generally major expenses for taxpayers, particularly if they own more than one home. This category will be limited to a total of $10,000 for 2018, regardless of what you’ve paid.
Interest You Paid – Home mortgage interest usually makes up the majority of this category, with the (TCJA) limiting this expense to mortgage interest on home loans up to $750,000. There was some confusion about home equity line of credit deductibility, so the IRS has provided some guidance here.
Miscellaneous Deductions – For 2018, fees paid to tax return preparers and registered investment advisory firms like TAAG will no longer be deductible. Other items eliminated include unreimbursed job expenses, rental fees for safe deposit boxes and hobby expenses. If any of these were a major portion of your itemized deductions this will impact your total as well.
After totaling all your deductions, if you estimate your 2018 deductions will be less than the $12,000 or $24,000 standard deductions described above, you may be better off taking the standard deduction. The major factor is your planned gifts to charity.
If you make significant contributions to charity each year, and those gifts take you over the standard deduction amounts, you may want to continue making your gifts just as you have in the past.
If your planned contributions are still below the standard deductions or are very close, you may want to consider “bunching” your contributions every other year or so.
For example, you could take the standard deduction in 2018, and make your usual year-end charitable contributions in January 2019, pushing two years’ worth of charitable contributions into one year.
Alternatively, you could set up a Donor-Advised Fund to receive larger stock and mutual fund contributions in years where you have a higher income, and take the standard deduction in lower years. Distributions can then be made out to your chosen charities throughout the year from your Donor-Advised Fund, just as you would normally make them. Donor-Advised Funds can be set up through companies like Schwab and Fidelity, or through community based organizations like the Greater Cincinnati Foundation. We’ve helped clients set up these funds and can walk you through the process.
Giving to charity has become a little more complex under the new tax laws, but supporting the organizations that need us is as important as ever during this giving season. Let us know how we can help you.