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Contributions Under the New Tax Law

How will the new tax law affect charitable giving? Are there any tax breaks left for donors?

Our friends and income tax experts, Lou Lauteria and Greg King at Lauteria & King, PLC, sent out a client alert to explain. We reprint their explanation below, which includes a great idea for your donors, then add a few thoughts of our own.

Under the Tax Cuts and Jobs Act (TCJA) which went into effect on January 1, 2018, it will be harder to claim the tax deduction for charitable contributions.

Charitable contributions may still be claimed as an itemized deduction. However, the higher standard deduction ($24,000 for joint filers, $12,000 for single filers, plus an additional $1,300 for individuals 65 and older), will cause many taxpayers who previously itemized to claim the standard deduction instead. In fact, the Tax Policy Center estimated in their latest analysis that the number of taxpayers who itemize will decrease by almost 60%. Consequently, without itemized deductions, most people will lose all tax benefits associated with charitable giving.

This is bad news for many charitable givers. But, if you are age 70 ½ or older and are receiving Required Minimum Distributions (RMDs) from traditional IRAs, you can continue to gain a tax benefit from your charitable contributions even if you do not expect to itemize deductions because of the higher standard deduction.

The key is to make donations by way of a “qualified charitable distribution” (QCD) from your traditional IRAs. QCDs (not to exceed $100,000) count towards your required minimum distributions without being added to your adjusted gross income.  In effect, you will be reducing your taxable income and taxes by having part or all of your RMD paid directly to charities of your choice.

Two key points to bear in mind:

  • QCDs must come from traditional IRAs; they cannot come from 401(k)’s; and
  • QCDs must be made directly by the IRA trustee to a charitable organization. Thus, a distribution made to an individual, and then rolled over to a charitable organization, is not excludable from gross income.

We loved Lou and Greg’s crystal clear explanation. We hope you and your donors will appreciate it, too!

Other possible strategies

Bunching

To get around the higher standard deduction, taxpayers can also use a strategy of “bunching” their charitable contributions into one year. As a result, some donors may skip their traditional December donation and wait until next year, or a later year, to make their gifts. But before you despair about cash flow, read the next paragraph.

Donor Advised Funds

The new tax law may also drive more gifts to donor advised funds, which have soared in popularity in recent years. A gift to a donor advised fund allows the donor to take a charitable contribution deduction in the year of the gift while deferring a decision on which nonprofit organizations ultimately benefit – and when they receive the funds. For example, a donor could make a large gift in one year to a donor advised fund to maximize the tax benefit then continue to direct annual gifts from the fund to a favorite charity.

Giving is not so simple any more.

The new tax law has changed the landscape for charitable giving. We are curious to see how donors respond!

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