With SALT deduction limitation under TCJA for most of the taxpayers charity dollars are not getting deducted. The standard deduction of $24,000 for married filing joint (MFJ) and $12,000 for single return is usually greater than the itemized deduction. Which makes the charity dollars non-deductible. Let’s take an example:
In 2019 Mary and Joe have real estate and state taxes of $18,000, mortgage interest of $8,000 and charitable contributions of $5,400. Taxes are deductible only upto $10,000 so total itemized deduction is $23,400 ($10,000+$8,000+$5,400). The standard deduction is $24,000. So they will not get any benefit of $5,400 they contribute to the charity.
So lets look into some tax planning techniques where they can actually deduct the charitable contribution dollars and get tax benefit out of it.
A Donor-Advised fund is like a charitable investment account which holds your charitable dollars till you are ready to donate to the charity of your choice. By using donor advised fund you can donate to the charities of your choice over a period of time. But you can get a charitable deduction upfront for all the funds you transfer to it in the year of transfer. Continuing the above example Mary and Joe contribute $5,400 to charities every year but do not get any deduction. With donor advised fund they can contribute 3 years of donation $16,200 ($5,400*3) to a donor advised fund in 2019. Now they can deduct $34,200 ($10,000+$8,000+$16,200) on their 2019 tax return. Assuming a marginal tax rate of 37% this will result in a tax saving of $3,774 ($34,200-24,000=$10,200*37%).
Charity from your IRA
For all of you who are 701/2 years or older this is a no brainer. You must give every dime to charity from your required minimum distributions (RMD). You can donate upto $100,000 from your RMD and the beauty of it is that amount does not get included in your Adjusted Gross Income (AGI) on your tax return. If an amount is not getting included in your AGI it is providing you with manifold benefits. Your social security income will be taxed at a lower rate. You will pay less in Medicaid premium due to lower AGI and on top of it you are not even including charitable contributions in your taxable income.
Continuing with the above example let’s assume Mary and Joe are 72 years old and are taking RMD of $150,000 from their IRA’s. This amount will be taxable to them. Now let’s assume they donated $5,400 from their IRA and took a cash distribution of $144,600 ($150,000-$5,400) from their RMD (the money must be distributed from the IRA to the done organization to get deduction). The taxable amount now is only $144,600 instead of $150,000. Assuming 37% tax rate the tax savings will be $1,998.
Your IRA custodian can provide you with a check book to make these donations if that’s easier for you. Talk to them.
Donate Appreciated Securities
If you are holding appreciated stocks donating them to a charity saves you capital gain tax on appreciated value in addition to providing you with charitable deduction for that appreciated value. So in effect this donation will save you 23.8% in capital gain tax and 37% tax on charity dollars. And that is just federal if you factor in state tax on capital gains; assuming your state tax rate is 7% you will save an additional 7%.
Continuing our example lets assume Mary and Joe owned stock of XYZ corp that they bought 10 years back for $400. In 2019 their value was $5,400. They donated them to a charity. Assuming they are itemizing they save
for a total tax savings of $3,188 ($1,190+$1,998) on $5,400 of donation of appreciated securities. A tax saving of 59.4% ($3,188/$5,400). If we include 7% state tax to the equation the savings will even be greater.
Donor-Advised funds offered by various financial institutions can be used to donate appreciated securities from which a periodic disbursement can be made at a later date. This will ensure you get a timely tax deduction on your tax return.
What I have provided above are some very basic examples. Tax savings can differ from person to person depending on their tax situation. And that’s the reason why tax planning during this time of the year, before you give out the bulk of your charitable giving’s, is most crucial. Contact your trusted tax advisors so that they can assist you with tax planning and tax savings.