Plan for Tax Changes

Zack Mccarthy | Flickr |

By G. Jeffrey MacDonald

As year’s end draws near, taxpayers with a heart for charity are finding Uncle Sam does not seem to love a cheerful giver quite as much as God does. It is becoming harder to claim a tax break for charitable giving under a new tax law that took effect Jan. 1. But personal finance experts say the new law need not put a damper on holiday season largesse.

Opportunities still exist to lower tax bills through generosity to beloved organizations. It just helps to plan ahead and give in ways that do not involve releasing cash from personal accounts.

This year’s biggest change: an increase in the standard deduction, which now allows individuals to automatically claim $12,000 and couples filing jointly to claim $24,000. Unless all deductions, including charitable gifts and mortgage interest, exceed those amounts, it is not worth itemizing and generosity brings no reward from the Internal Revenue Service.

Yet for those who find a way to bundle deductions, the benefits can still add up. Experts recommend consolidating several years’ worth of gifts into a single year for maximum tax benefit.

“Maybe in 2019 I’ll want to make a larger charitable contribution, like two years’ worth,” said Larry Pon, a certified financial planner and accountant in Redwood City, Calif. “Let’s say I give, in this example, $15,000 to my church. I get the tax benefit of my charitable contribution by doing that. So I kind of go every other year with itemizing or using the standard deduction.”

The idea is to push one’s deductions over the standard deduction threshold and then pile on the giving as the benefits of itemization kick in. For example: an individual who pays $4,000 a year in mortgage interest, $6,000 in property taxes, and $2,000 in qualifying medical expenses is already at the $12,000 standard deduction. Any charitable giving is now deductible, i.e., it is subtracted from taxable income for the year.

As experts grow familiar with the new law, they find some familiar financial instruments, like the donor-advised fund (DAF), come in especially handy.

Here is how it works. Instead of giving directly to a charity, the donor gives to a DAF, which then holds the assets. The donor may recommend where, when, and how much the DAF doles out in charitable distributions. DAF dollars might not go to charities for months or years, but because they are already set aside for charity and cannot be reclaimed, the donor may deduct the full amount as soon as the DAF is funded.

“A donor-advised fund is like a mini-foundation or private charity,” said John Scherer, a certified financial planner in Middleton, Wis., and a member of St. Dunstan’s Church in Madison. “That can be a way of facilitating some of these deduction bunchings.”

The Episcopal Church Foundation works with donors to create and manage DAFs, which must give the majority of dollars under management to Episcopal entities. Those seeking more flexibility can also open a DAF with fewer restrictions, such as those offered by Schwab, Fidelity, or another large brokerage.

Using a DAF is just one of several ways to reduce tax debt by having charities receive your gifts from a source other than your bank account.

Another example: giving appreciated stock from a custodial account directly to a charity. That empowers a donor to be more generous by giving a pre-tax donation, rather than personal cash that has been diminished by capital gains taxes after securities are sold.

And for taxpayers older than 70.5 who have a traditional IRA, experts have a rule of thumb: give directly out of your required minimum distribution (RMD) to a church institution or other charity. These qualified charitable distributions (QCDs) from the IRA are not counted as taxable income, which reduces a taxpayer’s burden. Pon recently recommended this strategy for a pastor’s widow who must take an RMD each year.

“I said, ‘Do you need the money?’ She said, ‘No, not really.’ So I said: ‘Give it to your church.’ With a QCD, you can give up to $100,000 from your IRA to your favorite charity. It fulfills the required minimum distribution requirement, and it’s not counted as your income.”


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