If you’ve ever taken a Michigan left turn, you know just how disorienting it can be. Instead of turning left where you expect to, the lane forces you to go past the intersection a good 20 yards, then takes you into a U-turn where you can then head in the direction you want to go. Confusing? Yes! At least the first few times you do it. But soon you realize how much sense it actually makes. The method eliminates backups at each intersection, improves safety, and helps traffic flow in a much more efficient way. It just feels a bit backward to us Indiana folks.
Preparing your tax return this year may feel just as disorienting. The Tax Cuts and Jobs Act (TCJA) may have been designed with the idea of simplifying tax filing, but so far it’s brought more confusion than simplification. From lack of guidance regarding how to calculate proper tax withholdings to lack of clarity on details like the Qualified Business Income (QBI) deduction, even many tax professionals have been scratching their heads as they search for the answers.
One thing that is clear about the new tax code is the increase in the standard deduction. The deduction for married couples filing jointly has nearly doubled, climbing from $12,700 to $24,000. Single taxpayers, and those who are married and file separately, will see a similar jump from $6,350 to the new $12,000 standard deduction. For many people, that increase will eliminate the need to itemize their tax deductions at all, which will help simplify tax preparation and filing. It does, however, make it more challenging to receive tax deductions for charitable gifts.
Of course, the purpose of giving is not to ‘receive’ through a tax deduction, but the more you save in taxes, the more resources you have to give where it’s needed most. Luckily, there are strategies that can help—even if they feel about as straightforward as a Michigan left. Here are two options that may make sense if you give $10,000 or more each year to charity:
“Bunch” your gifts into a single calendar year
The downside of the new, higher standard deduction is that it has the potential to wipe away the tax benefit of even a significant charitable contribution if your deductions don’t exceed the new standard deduction amount. The solution: “bunch” your charitable gifts into a single calendar year by tacking on next year’s planned gifts at the end of December. The higher total makes it possible to bypass the standard deduction and provide a tax deduction that would otherwise be lost. For example, let’s assume you are married and typically budget $10,000 in annual contributions to your church. Instead of contributing $10,000 in 2018 and $10,000 in 2019, consider making your total 2019 contribution on December 31, 2018. This would boost the amount of your charitable gift to $20,000 in 2018. Assuming you have at least $4,000 in other deductible expenses, you’ll be able to exceed the standard deduction of $24,000 and see a positive impact on your tax bill. If you have the money available, you may even consider giving a lump sum of $30,000 to cover the next three-year period. Your church will likely be thrilled with a sizable contribution to fund near-term projects, and you’ll reap the tax benefits. Keep in mind that if you give to multiple charities, that’s fine; the key is to bunch all of your giving—wherever you’re giving—into a single calendar year to receive the maximum deduction.
Set up a Donor-Advised Fund
Another option is to set up to a Donor-Advised Fund (DAF). A DAF also enables you to bunch your donations to take advantage of the current-year tax deduction, but it offers other distinct advantages—especially if you have a lump sum to contribute from an inheritance, significant capital gains, or other taxable income. Using a DAF, you can contribute any amount at any time, while taking the full tax deduction in the year you make the contribution. What’s great about this type of fund is that it gives you incredible flexibility as far as when and how much to give. Plus, as an investment account, it has the potential to grow over time, adding even more punch to your giving power.
Let’s say you inherited $100,000 in 2018. By contributing that amount to a Donor-Advised Fund, you would get a tax deduction for that amount for the 2018 tax year. However, you have the flexibility to choose when you want to parse out those funds—and to whom—at any time in the future. Some DAFs even have apps that allow you to click on a charity of choice and give on the spot from your mobile device. And when you give doesn’t matter because you’ve already received the tax deduction. You’re free to give today, next year, or 10 or 20 years down the road. You can even make your children ‘successor grantors’ for the fund; it’s a great way to reinforce the importance of stewardship for the next generation.
Giving doesn’t have to be complicated. That said, the new tax law does require some creative thinking and a smart tax strategy to help maximize your giving power. By working with your financial planner or tax advisor to determine the approach that is most appropriate for your own situation, you can put a strategy in place today to make every charitable gift count. Like the good old Michigan left, you’ll quickly find that the benefits are well worth the effort.