Release date: 01/12/2018
Tax Bill Strategies for Donors
Since passage of the largest tax overhaul in 30 years, we have been fielding emails, calls and queries every day from individuals and corporations to nonprofits and grantees. All are looking for clarity on how the bill could impact their giving. As your partner and resource in philanthropy, we want to share some insights and ideas on how you can best to adapt your strategy to the many changes.
We’ll begin by looking at strategies for donors who want to continue supporting causes they love in a tax smart way. Please note these are just a few ideas to consider. Always be sure to discuss with your tax advisor.
While most high-income households will continue to benefit from itemized deductions, perhaps the biggest change many donors will face is the near doubling of the standard deduction. In addition, most deductions are eliminated, and deductions for state and local taxes are capped at $10,000. Plainly, that means that for many of us – an estimated 30 million – 2017 was the last year to easily reduce federal income taxes by itemizing deductions, including charitable gifts.
So, what can you do?
Bunching. Bunching is a timing strategy where donations are doubled in one calendar year, and withheld in the subsequent year. The idea is to increase and consolidate your giving, so as to reach the new standard deduction threshold and be able to itemize your deductions. In the following year, you would refrain from making donations and claim the standard deduction. If you are financially in the position to double your gift, this would maintain your level of support to your favorite causes and offer a work-around to the increased standard deduction rate.
Donor Advised Funds. Donor advised funds are an ideal option for you to bunch your giving, making it easier to pass the new threshold for itemizing. For instance, say you’re a married couple filing jointly, and currently donating $5,000 per year. With a state tax deduction of $10,000, and a mortgage interest deduction of $7,500, you would then be within $7,500 of benefiting from itemized deductions. While $7,500 would be more than your average year’s giving, you could establish a donor advised fund – and in turn make distributions to your favorite causes for months or years to come. Bunching a larger gift into one calendar year for the deduction, and alternating itemizing with taking the standard deduction the next year can help you maintain your level of giving while navigating tax implications. Community foundations can be especially helpful in establishing and managing a donor advised fund, as our pooled investments may result in your fund growing over time, and our staff are here to facilitate your philanthropy. You’ll want to discuss with your financial advisor, but with a $5,000 gift you can open a fund and enrich your community today.
Charitable IRA Distributions. If you’re over 70 1/2 a direct distribution from your IRA can help reduce your taxable income and in turn maintain your cash flow. Reducing your taxable income can also help keep your Medicare premiums low. The process is fairly simple, and you can direct a distribution to any registered nonprofit organization. We’ll have more about that in a future blog post – stay tuned!
We’re here for you. First and foremost, we recommend discussing these options with your financial advisor. In addition, our knowledgeable staff would be happy to discuss either of these strategies with you. With some planning, you can continue making a difference to the causes you care about most.