Charitable Giving and Your Tax Strategy: Should You Itemize?
In 2017, the Tax Cuts and Jobs Act increased the standard deduction to $12,000 for individuals and $24,000 for married couples for the 2018 tax year. The IRS has announced that the number will increase to $12,200 and $24,400, respectively, for the 2019 tax year.
When the tax reform took effect, charities across the nation worried that this change would dramatically decrease their contributions.
Why? Because although the charitable giving deduction remained largely unaffected, taxpayers can only take advantage of that deduction if they itemize. Now that the standard deduction has increased so dramatically—and will continue to do so—the number of people itemizing for charitable giving has, unsurprisingly, decreased.
This change begs us to ask a few questions:
- If you do itemize for the charitable deduction, what should you consider?
- If you do not itemize, what should you consider to decrease your tax bill?
Here are a few questions to explore when deciding how, or if, you want to itemize your 2019 taxes for a charitable giving deduction.
If you choose to itemize, ask yourself … Can I combine my charitable contributions over multiple years to meet the threshold?
“Bunching” is when someone groups their charitable giving and itemizes only on alternate years. This strategy allows you to take the standard deduction for years when you don’t meet the itemization threshold and itemize when you do. Bunching your contributions over multiple years lets you count those donations into one tax year and receive a larger deduction.
Should I consider a donor-advised fund?
A donor-advised fund (DAF) allows you to contribute multiple years’ worth of charitable deductions into one fund. The fund provides you with a place to invest, manage, and distribute your donations. Your contributions to this fund are deductible immediately, even considering you haven’t yet donated the money from the fund.
Do I have appreciated assets I could donate instead of cash?
Instead of paying capital gains on appreciated assets, you could instead donate those assets directly to a charity or give to a DAF. This tax strategy is beneficial for multiple reasons. As we mentioned, it eliminates capital gains tax, but it also lowers income tax liability and allows you to give more in assets than you could in cash. You are able to give up to 30% of your adjusted gross income.
If you choose not to itemize, ask yourself … Could I use my IRA to contribute to charity tax-free?
If you’re more than 70 years and six months old, you can contribute $100,000, tax-free, directly from your traditional IRA. You are even able to roll over the money to multiple charities, as long as the amount doesn’t exceed the $100,000. This contribution counts toward your required minimum distribution (RMD) for the year. These Qualified Charitable Distributions (QCDs) work like a tax deduction in that the income from the IRA never hits your tax return, which is as good as a tax deduction.
Am I taking advantage of contributions to my retirement savings or health savings account?
If you decide not to itemize, you can instead find other, above-the-line, ways to save. This strategy focuses on tax savings you can deduct without itemizing. In this case, your retirement savings and your health savings account (HSA).
- Retirement Savings: The deduction amount, if you qualify, changes depending on your modified adjusted gross income and whether you file jointly or independently. You can find the full chart provided by the IRS here.
- HSA: Your after-tax contributions to an HSA are deductible as an adjustment to income. Like your retirement plan, this falls under specific requirements. You can find more information here.
Do I qualify for other tax credits?
If you qualify for tax credits, you are not required to itemize to take advantage of those credits. Your financial advisor can tell you which credits apply to your situation. But, to give you an idea, here are a few common tax credits:
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Credit
- Retirement Savings Contribution Credit
- American Opportunity Credit
- Lifetime Learning Credit
Whichever you choose—itemizing or taking the standard deduction—your financial advisor can look at your finances as a whole and advise you on the best course of action to meet your financial goals.
Contact Southwestern Investment Group today to create a 2019 tax plan that complements your charitable giving.
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