October 9, 2018
New tax law makes bundling gifts to donor-advised funds attractive
“Give, but give until it hurts.”
– Mother Teresa –
I don’t think Mother Teresa paid much attention to the tax code, but her quote is unusually prescient for 2018 taxpayers. The changes have made it unlikely to get a tax break on money given to your favorite charities.
When the Tax Cuts and Jobs Act was signed into law late last year, the intent was to reduce taxes and simplify the tax code for all Americans. Some of the more significant provisions were the increase of the standard deduction along with the elimination of many itemized deductions.
The standard deduction has nearly doubled to $24,000 for married couples filing jointly ($12,000 for single filers). The non-partisan Tax Policy Center estimates that more than 90% of tax filers will no longer need to itemize their deductions. Therefore, taxpayers who use the standard deduction would not get any tax savings from making charitable donations.
How the New Tax Law Reduces or Eliminates Charitable Deductions:
For example, let’s say that a married couple pays at least $10,000 (maximum deductible amount) in state and local property taxes, has mortgage interest of $5,000 and makes $5,000 in charitable contributions. This adds up to $20,000 in deductions, which is lower than the $24,000 standard deduction. The higher standard deduction eliminates the tax deductibility of charitable contributions.
How Bundling Restores your Charitable Deduction:
One way to get a tax break on your charitable donations is to bundle them into one year. For example, if you are likely to give $5,000 to charity each year, then making a one-time donation that covers the next 3-5 years to a Donor-Advised fund will allow you to get the tax break back.
Bundling Works Like This:
Say you make a $15,000 contribution to a Donor-Advised fund in 2018. Using the above example your total itemized deductions are now $30,000. ($10,000 state tax, $5,000 mortgage interest and $15,000 charity). The additional $6,000 in itemized deductions over the $24,000 standard deduction would be worth 24%-37% of the difference depending on your own marginal tax rate.
Additionally, you can use the Donor-Advised fund to make distributions to your favorite charities anytime (ie. spread equally over 3, 4 or 5 years or in any other timeframe you choose).
There are many Donor-Advised funds to choose from including ones offered by Charles Schwab and TD Ameritrade. You can contact your Rockbridge advisor, or check out these Step-by-Step Instructions to Set Up a Donor Advised Fund.