Charitable Giving and the New Tax Bill: Part I
Part I: Bunching Contributions
The recent changes to the tax code under the Tax Cuts and Jobs Act passed in late 2017 are changing the dynamics of charitable giving and leaving many wondering how to best enact their charitable giving strategy. For example, due to the higher standard deduction ($12,000 for individuals and $24,000 for married couples filing jointly) and the $10,000 cap on SALT taxes (state and local taxes), many individuals and families will no longer benefit from itemized deductions to the extent they did in the past.
Here’s an example:
In 2017, on Schedule A of Form 1040, John & Joan Smith deduct $8,000 in state and local taxes, $8,000 in mortgage interest and $7,000 in charitable contributions for a total of $23,000. They surpassed the previous standard deduction for married couples by $10,300 and had total itemized deductions of $23,000 to deduct on their Form 1040.
In 2018, due to the new tax law, the Smith’s $23,000 in itemized deductions will be less than the new standard deduction amount for married households filing jointly which is $24,000.
Put simply, the Smith’s no longer receive any tax benefits from their annual charitable contributions due to the increase in the standard deduction. This will likely be the case for many middle-income families.
Charitable Tax Deductions Allow for More Giving
On a societal level, one obvious issue with the new tax bill is that it disincentives charitable giving. Knowing that you will receive a tax deduction is a nice compensation for giving to a charitable cause. Of course, there are a whole host of reasons to be charitable beyond the tax benefit, but it is an extremely helpful benefit.
More, receiving a tax deduction allows families to give more than they could otherwise. If a family in the new 24% marginal tax bracket can donate $5,000 in after-tax income, they would be able to give $6,579 in pre-tax income without affecting after-tax cash flow. In other words, if charitable contributions are fully tax deductible, in this case $6,679 of gross income, donors can give more because they are not paying taxes on that income.
So what should charitable givers do so that they can continue to give and receive the helpful tax deduction? Is this even possible for most families?
Actually, yes. When it comes to charitable giving and the new tax landscape, there is a strategy that can help individuals and families continue to receive the tax deduction so that they can give more to the causes and organizations they believe in. Here’s how to have your cake and eat it too:
To continue deducting charitable contributions on your tax return, an important strategy going forward is to bunch 2-3 years or more of contributions into one year. In other words, instead of giving a consistent ‘x’ amount per year, the best strategy from a tax perspective will be to bunch a series of contributions together and donate it all in one tax year. For example, instead of giving $15,000 annually to your church or place of worship, you could time it so that you give $30,000 in year 1, then skip a year, then give $30,000 again in year 3. The total over four years stays the same.
Here’s how this 'bunching' strategy worked out for one of our clients:
Client Case Study
Jack and Diane Robinson are a married couple filing jointly. Every December, they set aside $10,000 and have a family meeting with their three children. During the meeting, they discuss causes that they care about personally and as a family, and each kid gets to choose what to do with a portion of the overall donation pot. As a family, they give an average of $10,000 in charitable contributions annually.
Previously, on their Schedule A Itemized Deductions, they averaged $25,000 in itemized deductions which included $10,000 in charitable contributions. Going forward, $25,000 is more than the $24,000 standard deduction. However, they are not getting the full benefit from their charitable contributions as only $1,000 extra is being deducted on top of the standard amount.
Here is what we proposed to the Robinson's during a recent review of their financial plan:
Starting in 2018, instead of contributing $10,000 in late December, they will wait until January of 2019 to make the actual donation, pushing the charitable contribution into the 2019 tax year. Then, in December of 2019, they will make their usual $10,000 contribution before year end.
As a result, in 2018 the Robinson’s will receive the $24,000 standard deduction, which is only $1,000 less than their typical itemized deductions. However, in 2019, they will be able to deduct $35,000 on Schedule A because they have bunched together two years of charitable contributions into one tax year.
Now, instead of giving $10,000 every December, they will give, or bunch contributions, in January and December of one year, then skip the next year, and start the process all over again. This way, instead of an additional $1,000 in deductions every year, they will receive an extra $11,000 in deductions every other year.
More, and this is important as well, they do not punish the causes they care about because of the lack of the charitable deduction. The charities only wait a few more days to receive the funds they rely upon, while the Robinson’s, and other families just like them, still receive the tax benefits of charitable giving.
On top of being food for the soul, charitable giving is an integral part of our social landscape and our tax code. Though recent changes in tax policy have complicated matters, it is still possible to enact giving strategies that allow individuals and families to continue being charitable while receiving a tax benefit. Ultimately, the ability to deduct charitable contributions allows us to give more than we would otherwise be able to give. For taxpayers looking to continue with their charitable plans, enacting a strategy like ‘bunching’ can be an efficient and productive way to give.
Trying to think through how to best enact your charitable giving strategy going forward? Setup a free consult with us below: