Year-End Tax Stategies: Charitable Giving

by Michael Velazquez

Movie buffs may remember about 20 years ago a comedy called Encino Man, starring Brendan Fraser and Pauly Shore. Fraser was a Neanderthal frozen in a block of ice, who was discovered when they were digging a pit for a swimming pool in Shore’s backyard. Good for some laughs.

Unless you have been frozen for several centuries like Encino Man, you have probably heard we have a new tax law (TCJA = Tax Cuts and Jobs Act) which took effect January 1, 2018. The discussion here will focus on charitable giving.

Three Major Changes

TCJA made 3 major changes to the rules governing charitable deductions:

Annual deduction limit went from 50% of AGI (Adjusted Gross Income) to 60% of AGI. Contributions above the annual limit are carried over, but no more than five years.

The right to deduct 80% of the contribution to an institution of higher learning in exchange for the purchase of tickets to athletic events has been repealed. No deduction is allowed for any portion of such purchase, charitable or athletic.

Provisions relieving donors of contemporaneous written acknowledgement when recipient charity files with IRS certain detailed information about the gift.

State Tax Credit

Because the TCJA limited SALT (State and Local Tax) deductions, some states saw this as unfair and responded by allowing state filers to reduce state taxes if they designate a charitable donation on their state tax returns. Up to 33 states have some kind of state tax deduction or credit in exchange for a charitable contribution. The IRS reacted by limiting the Federal deduction by the amount of benefit derived at the state level.

Standard Deductions

No doubt, TCJA changes may have a damaging effect on charitable giving, even if philanthropic intent remains high. If nothing else, this is due to the rise of the standard deduction, the threshold taxpayers must exceed in order to itemize their deductions, and a taxpayer must itemize to deduct donations. Standard deductions rose to $12,000, 18,000 and 24,000 for single, heads of households and married taxpayers, respectively.

Remember the QCD

For those of you in RMD (Required minimum distribution) age, the IRS wants you to withdraw a certain percentage of your retirement assets every year, or face stiff penalties if you don’t. The QCD, or Qualified Charitable Distribution was made for you. You can designate up to $100K of donations per year that could be withdrawn from your retirement accounts, without tax, and still satisfy your RMD requirements.

In summary, TCJA has changed the way traditional planning methods work when it comes to charitable donations. The right strategy will depend on what other deductions you nay have and whether it is better for you to itemize or use the standard and how flexible you may be with respect to your donations and their respective methodology.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.