By Richard Schwartz, CPA
Are you a Trump Tax Bill “tweener”?? If so, you are a taxpayer making sizable charitable contributions each year, but with the new tax law recently enacted at the end of 2017, no longer able to itemize your deductions, and therefore, will lose out on the tax deduction for those charitable contributions you will be making in the next year.
With the new tax law effective for taxpayers beginning in 2018, a married couple is limited to claiming a maximum deduction of $10,000 for combined real estate taxes plus state and local income taxes. Mortgage interest and charitable donations remain tax deductions. However, if your mortgage is paid off or your annual deduction for mortgage interest is small, you may no longer be itemizing your deductions going forward, and simply claiming the new standard deduction set at $24,000 for a married couple.
If you are one of these “tweeners” having no mortgage on your house, limited to a $10,000 deduction for state and local taxes, and donating less than $14,000 to charity annually, you will no longer be itemizing your deductions and will simply claim the $24,000 standard deduction. Thus, the new tax bill has indirectly eliminated the tax incentive for many high-income earners, who fall into this category, from making donations to charitable organizations.
Going forward, this group of taxpayers may want to consider establishing a Donor-Advised Fund (DAF).? As defined by Wikipedia, “a donor-advised fund is a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals. To participate in a donor-advised fund, a donating individual or organization opens an account in the fund and deposits cash, securities, or other financial instruments. They surrender ownership of anything they put in the fund, but retain advisory privileges over how their account is invested, and how it distributes money to charities.”
With a DAF, the donor takes a current year tax deduction for the full amount contributed to the fund in that year, which includes both cash and appreciated assets .? Please note that if you donate appreciated stocks and mutual funds into the DAF you set up, you claim the tax deduction based on the fair market value of the securities donated, and also avoid paying any capital gain taxes on those appreciated assets.
Ideally the donor would frontload several years of donations into one year, allowing the donor to exceed the $24,000 standard deduction for that one year, and then making no charitable donations over the next several years (and claiming the standard deduction on their tax return in those future years), but “advising” to which charitable organizations the DAF would grant funds to over those next years.
Establishing a DAF is a way to allow taxpayers the tax benefit of contributing and deducting charitable donations, where the new tax law may prevent the tax deduction otherwise.
To find out more about this tax saving benevolent opportunity, check out these following popular options:
- Fidelity Charitable (http://www.fidelitycharitable.org)
- Vanguard Charitable (https://www.vanguardcharitable.org/)
- Schwab Charitable (https://www.schwabcharitable.org/public/charitable/home)