Q. I am wondering if I can still get deductions for charitable gifts under the new tax law? Do you have any thoughts on this?
A. Yes. Under the Tax Cuts and Jobs Act, effective this year, the traditional method of making a gift and itemizing your deductions on your tax form, as in years past, may not work. This is because of the way the new Standard Deduction works: essentially, your charitable and other qualified itemized deductions would need to exceed the amount of the increased Standard Deduction before you would receive a tax benefit for your charitable gifts. Reason:you cannot claim both the Standard Deduction and itemized deductions; you must choose one or the other. Under the new tax law, the Standard Deduction has been almost doubled: it is now $12,000 per year for single individuals and $24,000 per year for a married couple filing jointly.
But, here’s the good news: there are some “workarounds” for those who are charitably minded, but also wish to also receive a tax benefit. Here are three:
1) Bunch Your Deductions and Make Them in Alternate Years. For example, if you are single and normally make up to $10,000 per year in charitable deductions consider, instead, making $20,000 per year in charitable deductions in alternating years.
2) Consider a Donor Advised Fund (“DAF”) Offered By a Public Charity. Many charities offer DAF’s to their contributors. A DAF allows you to contribute what would normally be several years’ worth of charitable donations into the fund in one year, and receive a charitable deduction immediately. Your contribution would then typically be invested and grow tax-free. Meanwhile, you could make donations to charities from that account as time goes on, whether in the year of gift or in following years. Additional contributions to the DAF in later years would also be tax-deductible. However, you should first check with your financial advisor to choose an appropriate DAF, selecting one with a good management and investment record. Since the advent of the new law, DAF’s have increased in popularity.
3) Consider a Qualified Charitable Donation Through Your IRA. If you are at least 70.5 years of age, and already taking Minimum Required Distributions (“MRD’s”) as required by the IRS, you could arrange to allocate some of your MRD draws directly to a charity of your choice. The contribution would still count toward your required MRD’s, and the distribution will not be included in your gross income, which essentially lowers your overall income tax bill. However, there are special rules. Notably, the contribution must be made directly from the IRA to the charity; it cannot be made to you initially, with you later turning around and sending the funds off to the charity. Check with your IRA custodian to see if it offers this service. I understand that Fidelity, Vanguard, T. Rowe Price, and Charles Schwab offer this option to their customers. Note: the charity must receive the contribution and cash the check before the end of the tax year to make this work. Although you will then receive a Form 1099-R, it is up to you – not your brokerage company – to properly report the contribution as a nontaxable Qualified Charitable Donation.
Reference: IRS Publication 5307 “Tax Reform Basics for Individuals and Families”.