Four months into living under the new tax law, it’s time for you to learn some new tricks that might just save you some money.
Before 2018, making a charitable donation likely lowered your income and lowered your taxes. In a very real way, Uncle Sam was your partner in giving. He’s not quite the partner he used to be!
Since January 1st and the dawn of our new tax law, you may not be enjoying any tax benefits from your charitable donations. That is, unless you change your method of giving.
When you donate to charity, you basically list out your donations and add them up. Using tax lingo, you itemize them. Other itemized deductions include things such as your mortgage interest, your property taxes, your state income taxes and your out-of-pocket medical expenses. The old tax law and the new one preserved these itemized deductions.
However, the new law made three notable changes to your deductions.
First, it now limits the combined deductibility of your property taxes and state income taxes to $10,000. Second, it completely wiped out the deductibility of your miscellaneous expenses. This means your investment management fees and the cost of your tax preparation aren’t deductible anymore. (Tip: talk to your advisor.)
These two changes may have lowered your total itemized deductions.
The third change is the near doubling of the “standard deduction” that every taxpayer gets automatically. For example, for an older, married couple, the new standard deduction is nearly $27,000. Last year, it was around $15,000.
Given the larger standard deduction, compared with your possibly lower itemized deductions, you may not even itemize your deductions at all. Therefore, it’s possible that your donations won’t increase your deductions and you’ll receive no tax break for having made them.
Thankfully, as always, there are some tricks to get around the new tax law that can help you preserve the tax deductibility of your charitable giving.
For those older than age 70.5, you can donate to charity directly from your IRA. These are known as “qualified charitable distributions” and they work to satisfy, in part or in whole, your annual required minimum distribution (RMD) from your IRA. The best part is, the money you give directly to charity out of your IRA doesn’t count as income on your tax return. Just like that, your charitable gift will lower your tax bill!
For those under age 70.5, that one isn’t yet in your bag of tricks. Instead, you might consider “bunching up” years worth of your charitable donations into a single year. The objective is to deliberately boost your itemized deductions above your new standard deduction, at least for that year, and reap some tax benefits for your giving.
An elegant way to accomplish this bunching is by opening a donor-advised fund. Rather than feeling pressure to give it all way now, the donor-advised fund enables you to calmly decide your future giving, as needs arise, long after you’ve enjoyed your immediate tax benefits.
Jason P. Tank, CFA is the owner of Front Street Wealth Management, a fee-only wealth advisory firm located in Traverse City. He encourages questions and comments about future columns. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com