There are many reasons that people donate to charities and the charitable giving tax deduction has always been one of them. However, by eliminating many other itemized deductions and increasing the standard deduction, the new tax law has reduced the tax incentive for charitable giving. Many taxpayers feel that they cannot continue to contribute to charitable causes to the extent previously possible.There are, however, a number of ways that you can retain the tax-saving benefits of your charitable giving in spite of the tax reform.
Here are just a few charitable giving tax strategies to consider before the end of the year:
Bunch your charitable gifts
As we noted in our March 23, 2018 blog post , you can get the most out of both the standard deduction and the itemized charitable deduction by “bunching” (also known as “bundling”) your charitable gifts – and still give the same amount to charity as you usually do!
With bunching, you make your charitable donations every other year, itemizing your tax deductions in the year you contribute and taking the standard deduction in the year that you don’t. For example, you would double a $6,500 annual donation in December 2018 – making a $13,000 gift—and deduct the entire amount on your 2018 tax return. In 2019, you would not make a donation and take the standard deduction.
For the most flexible and tax-efficient charitable giving, consider making your donations through a donor-advised fund at your local community foundation . A donor-advised fund allows you to make your tax-deductible transfer in the year in which you need the deduction, and instruct the fund’s administrator to make distributions to the charity or charities of your choice whenever you wish. This way you can continue to make annual contributions without sacrificing your charitable tax deduction.
Keep in mind that the new tax law limits the amount you can deduct to a public charity to 60% of your adjusted gross income for the year.
Make a gift of property instead of cash
By making a gift of property instead of cash, you may deduct the fair market value of the property instead of what you paid for it. If you have an item such as a work of art or some other collectible that has appreciated in value, you can deduct the current fair market value of the item. This way, you avoid paying tax on the appreciation and get a tax deduction as well.
Set up a charitable remainder trust
A charitable remainder trust (CRT) can increase your income, save taxes and benefit charities as well!
With a CRT, you transfer a highly appreciated asset like stock or real estate into an irrevocable trust. You receive an immediate charitable income tax deduction for that transfer that you can carry forward up to five years, if needed. The trustee of the trust then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets. For the rest of your life, the trust pays you an income and after you pass away the remaining trust assets go to the charity or charities that you have chosen.
This option is popular with taxpayers who have highly appreciated assets that produce no income. A CRT creates both a charitable income tax deduction and can covert a nonproductive asset into an income stream that lasts a lifetime. It also enables you to get the asset out of your estate for estate tax purposes.
Designate a charity to receive your retirement proceeds
If you are 70½ or older, you can reduce your tax liability by designating a charity as a beneficiary of your retirement plan. There is no deduction allowed, but any amount distributed to the charity is not included in your annual income (and not reported on your tax return). The charity also does not pay tax on the proceeds. The limit is $100,000.
Gift a remainder interest in your home with a life estate
Although difficult to plan at year-end, gifting a remainder interest in your home is something you might wish to consider this year or next. This option involves living in your home, or renting it out, for the rest of your life and your spouse’s life. After that, your home goes to the charity of your choice.
There are multiple tax benefits to this arrangement: You receive an income tax deduction now (and can carry it forward for up to five years, if needed). You don’t pay any capital gains tax, and since the house is removed from your estate there is no estate tax either.
Hire an experienced tax firm for help with tax efficient charitable giving
The new tax law has had a significant impact on charitable giving. With proper planning, however, you can limit that impact to your charitable giving strategies, without lowering your support to those in need. The California attorneys and accountants at Moskowitz, LLP are available to help you with all your tax and estate planning, including providing you with a charitable giving tax plan and/or a variety of year-end charitable giving tips. For assistance with maximizing your tax savings, contact our San Francisco office today.