Dealing with charitable giving changes under new tax law

The landscape of charitable giving has changed. With the passing of the Tax Cuts and Jobs Act of 2017, new rules were enacted that should have you rethinking how much you give and when you give it.

So what changed?

The biggest change is that the standard deduction expanded for single and married filers to $12,000 and $24,000 respectively. Each taxpayer over the age of 65 gets an additional $1,300 deduction. Cheers to the senior discount.

Taxpayers can claim the greater of the standard or itemized deductions.

For most middle-income taxpayers, itemized deductions include state and local taxes (including real estate and property taxes), mortgage interest and charitable contributions. These are the big three. The new tax law did not eliminate these deductions, but it did limit the deduction for taxes paid to $10,000 for individual and married taxpayers.

The biggest implication of these changes is that most middle-income taxpayers, especially married couples, will claim the standard deduction going forward and charitable contributions will become irrelevant for income tax purposes. It is important to note that the new laws revert to the old laws in 2026, but we’ll cross that bridge when we get there.

Say that Jack and Jill earn $150,000/year, pay $10,000 of state and local taxes, $8,000 in mortgage interest and give $5,000 to charity. Their total deductions are $23,000, which they would have itemized under the old tax rules.

Under the new tax rules, they will claim the higher standard deduction of $24,000, regardless of whether they had made charitable contributions.

What’s the plan? Jack and Jill should bunch charitable contributions into a single year so that the contributions, along with their other itemized deductions, exceed the standard deduction.

Continuing with the prior example, let’s say Jack and Jill earn $150,000/year, pay $10,000 of taxes, $8,000 in mortgage interest, but they clump three years of giving into one year and claim $15,000 of charitable contributions.

Now, their itemized deductions total $33,000, or $9,000 more than the standard deduction, which would save them about $2,000 of taxes. Can you say…date night?

What if you give regularly to a church or charity and don’t want to skip years of donations? There’s a tool for that — a donor-advised fund.

Gifts to a donor-advised fund can be cash or even appreciated stock. You claim the contribution as an itemized deduction in the year made, but you can support your favorite charities whenever you want through grants, even in years when you take the standard deduction. The only stipulation is that the grants must support qualified charities.

While the money is in the donor-advised fund, you can invest it. The earnings grow tax-free, thus enhancing the magnitude of your giving.

You can set up a donor-advised fund through any of the large discount brokerage firms like Charles Schwab or Fidelity or locally through The Greater Kansas City Community Foundation. A local Certified Financial Planner professional can also help you set up a fund and implement an appropriate investment strategy.

Each option has minimums and fees that you should carefully review before moving forward.

Dan Mathews is a Certified Financial Planning professional, a member of the Financial Planning Association of Greater Kansas City and a Private Wealth Manager with Creative Planning, Inc. He is currently one of a select group of CFP Board Ambassadors throughout the country, whose mission is to provide personal finance resources to the community, policymakers and local media.

This story was originally published October 22, 2018 at 12:00 AM with the headline "Dealing with charitable giving changes under new tax law."