The Tax Cuts and Jobs Act of 2017 has done away with many deductions, changed the standard deduction, and limited other deductions. These changes will likely prompt a change in you charitable giving strategy in order to maximize the tax impact.
With the standard deduction for joint filers now at $24,000 compared to $12,700 in 2017 (unless you are over 65 or blind) many filers will not be able to itemize thus losing the tax impact of charitable contributions. In addition, there is now a $10,000 limit on deductibility of state and local taxes combined with real estate taxes. Lastly, the ability to deduct unreimbursed employee expenses and investment expenses are now gone with the new tax law. These changes will prove more difficult for taxpayers to be able to itemize deductions on Schedule A.
If you have paid off your home and have minimal out-of-pocket healthcare expenses you may be one of the many who no longer can itemize. This is where multiyear planning may be of benefit. A lumping of charitable contributions can possibly provide a tax benefit every few years instead of no direct benefit annually.
Say a couple have $15,000/year in state and local taxes and an additional $15,000 in property taxes on a home that is paid off. They give $5,000/year to their favorite charities. For 2017 they deducted 100% of all of these for total of $35,000 on Schedule A because it was greater than $12,700 standard deduction. They were able to realize tax benefit from the charitable contributions. In contrast for 2018 they would only be able to deduct a total of $10,000 from state/local and real estate taxes. With the $5,000 charitable contribution their total deductions on Schedule A are $15,000. This is less than the new $24,000 standard deduction. Therefore in 2018 the couple would not be able to itemize and thus would not get a tax benefit from the charitable contribution.
This is where lumping multiple years of charitable contributions in a single year can provide some tax benefit to the couple. If the couple gave 4 years of charitable contributions in 2018, they would itemize on Schedule A $20,000 (4 X $5,000) plus the $10,000 in state/local and property taxes for a total of $30,000. The couple would be able to itemize as the deductions would be greater than $24,000 standard deduction. The result would be a $6,000 tax benefit for the lumping strategy. The next three years they would not make a donation and simply take the standard deduction. The end result is the same dollar amount of charitable contributions with some tax benefit that they otherwise would not receive with annual contributions.
David P. Stone CPA, CFP® is co-founder of Tartan Wealth Management, a full-service wealth advisory firm offering both investment management and tax planning services.
None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Tax Services are not offered through, or supervised by, The Lincoln Investment Companies.