We recently met with our accountant and he was sharing his view on and updates of the new tax plan that was passed. Bottom line, it is going to be tougher to itemize on your tax return moving forward.
To begin with, the standard deductions have been moved up to $12,000 for single and $24,000 for married filing jointly and your charitable giving won’t be as deductible as it was in the past. For some of you, this may look like nothing but gray skies but for others, there may be a silver lining in those clouds, especially if you are a giver.
Let’s talk about Donor Advised Funds. With a donor-advised fund, donors receive an immediate tax deduction when they make a charitable contribution to a donor-advised fund. This donor-advised funds strategy involves your charitable giving and it makes a lot of sense if you meet two qualifications.
- You historically give more than $5,000 filing as a single or $10,000 filing jointly each year.
- You are sitting on enough cash in the bank (earning nothing) to combine two years of giving into your own donor-advised fund.
This may sound complicated, but it is rather slick. Let’s look at an example of how using a donor-advised fund could help your tax deduction picture.
To start with, your IRA/401K/403B contributions still come out pre-tax and lower your gross income. Then if you want to deduct more than 24,000 as husband and wife or 12,000 individually this is the formula you need to understand:
- $10,000 Property & State Taxes (Let’s say your property taxes are 6,000 and your State taxes are 6,000 that would add up to $12,000, but they get capped at $10,000.)
- $4,000 Mortgage Interest up to $750,0000 Loan (Let’s say that it is $4,000 for our example.)
- $0 Charitable Giving (In order to take a deduction on this, you would need to give away more than $10,000 to a charity of your choice.)
- Total Itemized Deduction – $14,000
Using Donor Advised Funds, the deductions involving your Property & State Taxes as well as your Mortgage Interest would stay the same but your Charitable Giving deductions change dramatically:
- $10,000 (Cap for Property & State Taxes. So, let’s say your property taxes are 6,000 and your State taxes are 6,000 that would add up to $12,000, but get capped at $10,000.)
- $4,000 Mortgage Interest up to $750,0000 Loan (Let’s say that is $4,000 for our example.)
- $20,000 Charitable Gift to a Donor Advised Fund which is 100% deductible in the current year (2018) and then you give the money away over 2018 and 2019 from the Donor Advised Fund.
- Total Itemized Deduction – $34,000
Utilizing a Donor Advised Fund, your total itemized deduction ends up being $34,000 instead of $14,000 as you are able to deduct the full amount of your charitable giving over two years ($20,000) instead of zero over one year.
In 2019, you would just claim the standard deduction. Then, in 2020, you just repeat the process, front-loading your giving for 2 years into your donor-advised fund and claiming the deduction.
Like we said, this may be advantageous to some of you and not to others but at least talk with your accountant this spring about your charitable giving and get the most bang for your buck when it comes to your tax deductions.
As always, if you want to learn more, feel free to contact us!