How does tax reform affect the deductibility of my charitable giving?

  • The standard deduction for 2019 is $24,000 for taxpayers filing joint returns and $12,000 for individual filers. For 2017, the amounts were $12,700 and $6,350, respectively.  This increase in the standard deduction, coupled with significant limitations on the deductibility of state and local taxes (including income, sales and real estate taxes) and the elimination of certain other deductions, will substantially reduce the number of taxpayers who have sufficient deductions to itemize. Taxpayers who take the standard deduction, instead of itemizing, are unable to deduct their charitable contributions.

With this change, how can I maximize the tax benefit of my charitable gifts?

  • Bunch Charitable Gifts: If you satisfy a multi-year pledge in one year, or make what would otherwise be multiple annual gifts in one calendar year, you may have enough deductions to get above the standard deduction threshold and deduct your charitable gifts.  This depends on the total amount of your deductible charitable giving and your other deductions.
  • Establish a Donor-Advised Fund: A donor-advised fund (or DAF) is a philanthropic account set up with certain charitable sponsors, like the Community Foundation of Southern Wisconsin, the Stateline Community Foundation or the charitable affiliates of certain brokerage firms, like Schwab, Vanguard or Fidelity, which enables you to make a contribution in one year, but recommend charities of your choosing to receive the money in either the current year or future years.  For example, if you contributed $25,000 to a DAF in 2019, you would generally get a charitable deduction in 2019 since you would be above the standard deduction limit. [We say “generally”, because deductibility is subject to various limitations, including that the amount you can deduct is limited to 60% of your adjusted gross income (“AGI”) for cash gifts and 30% of your AGI for gifts of appreciated securities, mutual funds, real estate, and other assets.  There is a five-year carry forward for charitable gifts that exceed the AGI limitations].  In our example, this $25,000 contribution to a DAF could be distributed to qualifying charities of your choosing, like HealthNet of Rock County, over multiple years.  This allows you to effectively bunch your contributions in one year for tax purposes, but your gifts can be distributed to the charities you decide to benefit in the current or future years.  Each provider of DAFs has its own rules, minimum contributions and fees, but a DAF is much simpler from an administrative perspective than setting up your own private foundation.
  • Make a Charitable Gift from your IRA: If you are age 70½ or older, you can direct your traditional IRA administrator to make a distribution directly to qualifying charities, like HealthNet of Rock County, of any amount up to a total of $100,000 per year (administrators may impose a minimum amount).  Unlike other IRA distributions, the transferred amount is excluded from your taxable income (so has the same impact as a deduction), and also satisfies the minimum distribution requirement.  However, this only works if the distribution to the charity is made directly by the IRA administrator.

Do you have any other suggestions to maximize the tax benefit from gifts?

  • Donate Appreciated Securities. What hasn’t changed is that if you donate appreciated securities held for more than one year to a DAF or qualifying charity, like HealthNet of Rock County, their value for computing your charitable deduction is the fair market value on the date of the gift, and any appreciation in the securities is NOT subject to capital gains taxes.  Even if you do not itemize in that year, or the deduction is limited for other reasons based on your adjusted gross income in that year, you still avoid the capital gains taxes on the built-in gain.  You have to donate securities, however, not the cash proceeds from the sale of securities, to avoid the capital gains taxes.

Any other thoughts?

  • We are not your tax advisors, nor are we legal experts. Please check with your tax advisor as to how these tax law changes and possible strategies affect you given your personal tax situation. The tax laws change from time to time; this reflects the federal income tax law as of July 16, 2018.
  • While the tax laws have changed, HealthNet of Rock County’s mission of serving the uninsured, underinsured, and low-income residents of Rock County has not changed, and we can’t be successful without the support of you and our other wonderful donors!

This article was originally written by Godfrey & Kahn, SC., and modified by HealthNet of Rock County, Inc.