New Tax Law Sapped Charitable Giving – How to Wisely Give and Deduct
‘Bunching’ is a strategy that can get you back to itemizing for tax savings
A key element of the tax reform law that went into effect with 2018 tax-year returns was a much higher standard deduction. Single tax filers can choose a $12,000 standard deduction; married couples filing jointly, $24,000.
The new tax law also limits the amount of state and local tax (income and property tax) that can be claimed as an itemized deduction to $10,000 per household.
So, far fewer households chose to itemize on 2018 tax-year returns because the value of the standard deduction was higher.
Through mid-July of 2019, the IRS reports that for the 2018 tax year, 14.66 million individual tax return filers chose to itemize. A year earlier, 42 million returns were itemized.
That shift impacted charitable giving. In 2018, 33.6 million tax returns (for the 2018 tax year) claimed $160 billion in charitable income tax deductions. In 2019, (for the 2018 tax year) 12 million returns claimed $102.7 billion in charitable deductions. The deductibility of charitable donations was not changed by tax reform. What did change was the value of itemizing, and itemizing is the only way to deduct donations.
Here’s how to claim charitable donations as an income tax deduction:
Bunch your donations
Consider making bigger donations one year and then skipping donations for a few years. For example, if you give a total of $2,000 a year to various charities, you might consider donating $6,000 one year, then taking a break. Of course, you need to have the cash flow to make the big donation in one year. If you do, the value of that “bunched” charitable giving, combined with your $10,000 in state and local income tax deductions and your mortgage interest, could tip your tax situation into favoring itemizing for that year.
Rebalance, donate, deduct
With the bull market into its 10th year, you might also want to consider donating an investment held in a regular taxable account. When you donate appreciated stock (or bonds or funds or exchange-traded funds shares – or art for that matter) you do not owe capital gains tax on the profit, and the fair market value of the asset when you donate it can be claimed as a deduction. Two caveats: The value of donated assets can’t exceed 30% of your adjusted gross income for that tax year.
Take your time disbursing your donations
A common concern with bunching: You don’t want to commit all the giving in one year and then not have money to donate to other causes in the years you are not bunching. There’s a workaround for that too.
Donor advised funds (DAF) may sound like fancy-pants accounts for the 1%, but they are, in fact, built to serve a broader audience with donations starting as low as $5,000.
A DAF is your own charitable fund. Money you use to fund your DAF can be claimed as an itemized deduction in the year you make the contribution. But you aren’t required to immediately donate that money. You are allowed to spread out the donation over as many years as you want.
Let’s say you want to bunch together $15,000 in donations this year to make itemizing advantageous. But that $15,000 represents three years of your giving budget.
No problem with a DAF. You direct your DAF to disburse $5,000 to the charities you want to support this year. Next year and the year after, you do the same. There is no time limit; you could leave the DAF to your heirs to continue your legacy of giving.
There are thousands of DAFs you can open an account with; many are community-based organizations that encourage charitable giving.
Fidelity, Schwab and Vanguard all run DAFs for clients. Working with a DAF provider in the financial service industry might be an advantage if you expect to use appreciated assets to fund your DAF. The brokerages are set up to handle selling investments for you.
Vanguard requires an initial investment of $25,000. Fidelity and Schwab start at $5,000. All three charge an annual “administrative” fee that starts at 0.6%.
The annual fees are important to consider. If you prefer to have every penny going toward charities, you might consider the bunching strategy with the intention of immediately making donations.