Taxpayers need to be aware of the tax code changes due to the 2017 Tax Cut and Jobs Act. The primary beneficiaries of the act are corporations, who now receive a 21 percent tax rate, but individuals can utilize the higher standard deduction and see the savings from the change in tax brackets.
One of the most significant changes is the $10,000 cap on state and local tax or SALT deductions. Taxpayers living in states with high real estate property taxes and high income taxes like New Jersey, New York, and California, will feel the effects of the cap. The Tax Policy Center estimates the changes will cut how many taxpayers itemize deductions from 37 million to about 16 million. This cap can create a ripple effect because those who itemized deductions, including those who make qualified charitable donations, might not exceed the standard deduction and can cause your tax burden to increase.
Taxpayers who frequently make charitable donations should ensure that they receive the maximum tax benefits from their good deed. Plan ahead and let’s look at some strategies that could maximize your donation and reduce your tax burden.
Give to Charity – Chunky Style!
One strategy to take is to combine two years of charitable contributions and chunk them together. Make contributions in December and January, instead of every January, and you may be able to take the standard deduction one year and itemized another. You can still give the gifts you want, but with slightly modified timing.
Donor Advised Funds
Another way to approach chunking is to make multi-year gifts in a single tax year, but utilize a donor-advised fund or DAF. Individuals who contribute to DAFS get a tax deduction the same year of the contribution but can dictate when to distribute it to the charity. This allows you to put a lump sum in a DAF and spread it out over many years or to multiple charities of your choice. You’ll retain control and still maximize your tax savings.
Look at Your IRA
Taxpayers over the age of 70 ½ have the option to make a qualified charitable distribution or QCD from funds in their IRA account. The QCD applies to meeting the required minimum distribution or RMD but doesn’t count as taxable income. This method allows a taxpayer to get the benefits from charitable contributions but doesn’t require that they itemize their deductions to receive the financial benefits.
Consult with a tax professional if you’re unsure about whether to itemize or use the standard deduction. Tax advisors know what expenses help your situation and can help you take the path with the lowest tax burden. Planning can reduce how much you pay in taxes, so take the time to do it now instead of worrying about it when the April deadline approaches for filing. You’ll be glad you did and aren’t paying more taxes under the new law simply because you decided to be charitable.