The Tax Cuts and Jobs Act of 2017 did a lot more than cut tax rates. The doubling of the standard deduction made homeowner deductions for mortgage interest and real estate taxes a thing of the past for most people. But it upended something else too.
Charitable giving.
Read on and I’ll tell you two ways you may still give and enjoy a tax break.
Giving for people who aren’t rich
No, I’m not talking about charitable giving for people who have hospital wings, museums and college dormitories bearing their names. Big giving wasn’t particularly affected by the tax cut bill.
But if you’ve been a giver from income, a tither or an itemizing giver, odds are that much, if not all, of your tax benefit disappeared when the new tax law went into effect. You can understand why with a simple example.
The tax bill nearly doubled the standard deduction from $6,350 to $12,000 for a single-person tax return and from $12,700 to $24,000 for a joint tax return. While it’s pretty easy for single people to have over $12,000 in itemized tax deductions, it’s a major stretch to those with joint returns to exceed $24,000.
A $24,000 standard deduction is HUGE
That same $24,000 deduction amounts to 40 percent of a $60,000 income, 30 percent of an $80,000 income, 24 percent of a $100,000 income and 20 percent of a $120,000 income. Yet, according to a recent analysis by the website www.DQYDJ.com (Don’t Quit Your Day Job), 75 percent of all households have income below $111,060. Nine of every 10 households have incomes below $178,793.
For most of us this means Uncle Sam is no longer our partner in giving.
A “work around” would be good here.
Two work particularly well if you are retired and have some savings as well as income.
Charitable gift funds.
These funds, which can be established with relatively small amounts of money, can help you get a tax benefit by funding a gift account with cash or shares of appreciated stock and then giving the money out over a period of years.
Suppose, for instance, that your joint household income is $100,000 and you like to make annual charitable contributions of $10,000. Do that annually and all your itemized deductions are unlikely to exceed the standard deduction.
But if you alternate years by timing your real estate tax payments and charitable giving, your itemized deductions could be well over the $24,000 standard deduction every other year. Make a big contribution in a year with, say, a big gain (hope springs eternal) and you can put enough cash into a gift fund to cover several years of charitable giving.
Give shares of an appreciated stock and you get two tax benefits — you avoid the capital gains tax and still get to deduct the full value of the shares.
Fidelity, Schwab and Vanguard (and other financial service firms) offer such funds. My wife and I have had a charitable gift fund at Schwab or Fidelity since 2006. We’ve been delighted with both firms at how they simplify giving and make it easier to give regularly rather than in a hurry at year-end. You don’t have to be embarrassed about being a small fry — our first fund started with $50,000 — and both firms allow grants as low as $50.
Charitable Gift Fund Basics
—Fidelity has a minimum initial donation of $5,000, an administrative fee of $100 or 0.6 percent, and a minimum grant size of $50.
—Schwab matches Fidelity with a minimum initial donation of $5,000, an administrative fee of $100 or 0.6 percent, and a minimum grant size of $50.
—Vanguard has higher requirements with a minimum initial donation of $25,000, an administrative fee of $250 for accounts less than $15,000 or 0.6 percent, and a minimum grant size of $500.
All three have lower administrative fees for accounts over $500,000. Fidelity has higher-cost investment fund options than Schwab or Vanguard, which both offer low-cost index fund options. This is one of the few product areas where Vanguard isn’t a shoe-in for lowest all-in costs.
Qualified Charitable Distributions
A second work-around is more tactical: qualified charitable distributions. If you are of required minimum distribution age (70 ½), distributions from your retirement account made directly to a charityare not counted as taxable income. But they are counted as a portion of your required minimum distribution.
(It’s important to note that the distribution must be made directly to a charity, NOT to a charitable gift fund.)
Here’s an example. Suppose you need to make a required minimum distribution of $40,000. By gifting, say, $30,000 directly to one or more charities, the only addition to your taxable income will be the remaining $10,000. So even if you don’t itemize, this reduces your taxable income and your tax bill. The same action, by reducing your taxable income, may work to lower the amount of your Social Security benefits that are taxed. For high-income retirees it can help avoid higher premiums for Medicare.
Neither of these tax savers are things you should do “in your spare time, at home.” While the new tax law simplified taxes for millions of people, we still have one of the most complicated and thoroughly wretched tax systems in the world. If these ideas seem right for you, plan your tax return with a professional.
Related columns:
Scott Burns, “Texas and Home Ownership Tax Benefits,” 9/28/2018 https://scottburns.com/texas-and-home-ownership-tax-benefits/
Sources and References:
Fidelity Charitable https://www.fidelitycharitable.org/giving-account/giving-account-details.shtml
Schwab Charitable https://www.schwab.com/public/schwab/investing/accounts_products/accounts/trust_estate/donor_advised_fund
Vanguard Charitable https://www.vanguardcharitable.org/individuals
“United States Household Income Brackets and Percentiles in 2018,” 12/8/2018
https://dqydj.com/united-states-household-income-brackets-percentiles/
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pexabay
(c) Scott Burns, 2018