Year-End Tax Planning for Charitable Donations

The Tax Cuts and Jobs Act of 2017 was passed at the end of last year, and generally took effect in 2018. One feature of this legislation is an almost doubling of the standard deduction for most tax payers. Because of this steep increase, more taxpayers are likely to take the standard deduction for 2018, rather than claim itemized deductions. Therefore, these taxpayers will lose the tax benefits from their charitable contributions.

Thinking ahead

Taxpayers who find themselves in this situation may have some options to regain the tax benefits of their charitable contributions. One possible tactic would be to make a deductible charitable contribution to a donor advised fund in late 2018 sufficient in size to cover several years of the taxpayer’s planned charitable giving in order to increase the taxpayer’s itemized deductions over the standard deduction amount.

In this scenario, the taxpayer could advise the charitable fund to disburse money contributed to the donor advised fund in 2018 over the next several years. Because the deduction was taken in 2018, no further deductions would be available for these transfers. The taxpayer would essentially be prepaying several years’ contributions in order to get some tax benefit from these expenses.

There are tradeoffs here, including forgoing the use of money by prepaying donations. The higher your tax bracket and the closer your other itemized deductions to the standard amount, the more such efforts might be tax efficient. Our office can walk you through some possible plans.

Use RMDs to your advantage

Yet another approach may be viable for taxpayers age 70½ and older who are taking required minimum distributions (RMDs) from their IRAs. Assuming that your RMDs at least equal your planned donations, you might benefit from making your charitable contributions through qualified charitable distributions (QCDs).

QCDs provide no charitable deduction. They do, however, reduce taxable income by reducing taxable RMDs. This provides taxpayers the possibility of saving on taxes because they report less income on their joint return.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.

Bookmark the permalink.