By Brandon Miller, CFP–
If you’re an itemizer, the new tax laws that are kicking in this year may be good news or not, depending on your situation. One of the biggest changes is that the standard deduction has now doubled to $24,000 for married couples and $12,000 for individual filers. Many people who used to benefit from itemization can now return to a simpler form.
A less-stressful April 15 sounds great—unless you run a charity. The new law could really hurt organizations that depend on the kindness of strangers (or at least, donors).
That’s because the only way to get a tax benefit from charitable contributions is to itemize your taxes. So, one unintended consequence of the new law is that charitable giving may drop because many people are no longer itemizing.
But you don’t have to let these tax changes curb your generosity. There are ways to continue donating to your favorite Good Deed Doers and still get a tax break for it. You just have to handle things a little differently.
In fact, there are three strategies that you can use, ranging from extremely simple to so expensive it might be a moot point because you’re likely someone who will continue to itemize. But let’s talk about all three anyhow.
“Bunching” Donations
The easiest way to have your cake and give it away too is to use a strategy called bunching. This is pretty much what it sounds like. You take the amount you plan to contribute over several years and donate it all in a single tax year. As long as the amount is over the standard deduction threshold, you can itemize your taxes the year you make the “bunched” contribution and get a tax break for your donations. And in the other years, you simply take the standard deduction.
Say, for example, that you give $600 a month to the SPCA, which adds up to a $7,200 contribution every year. If you bunch four years worth of donations in a single year, that would be $28,800, which is over the threshold for married filers. And if you’re that generous and a single filer, you only have to bunch two years of donations together.
Of course, there are drawbacks to this strategy for you and your charity. You have to come up with a significant amount of money in a shorter period of time. And the charity gets a bonanza one year, then nothing in the years between your bunched payments.
Donor-Advised Funds
If you don’t want your charities to have to deal with the all-or-nothing contribution tactic, a donor-advised fund provides a fairly simple way to even out your donations.
These funds work just like bunching in that they let you donate your money in a single year and reap the tax benefits that year. What’s different is that the fund pays your donation amount to your charities over time, not all at once. The charity can get an equal payment from you via the fund each year, even in the years where you’re not itemizing.
Donor-advised funds are also a great way to gift highly appreciated assets, such as Apple stock that you bought back in 1980. Just remember that once donated, you can’t get your assets or money back. But you can direct the fund’s administrator to give the amount you specify to the charity you choose.
And some funds allow for your donations to be invested, which could potentially increase the amount of your contribution. Just make sure that any administrative or investment fees don’t cost more than your potential gains.
Private Foundations
The third strategy for continuing to get tax breaks from your charitable giving is certainly not for everyone since it can cost upwards of $10,000 just to establish. But for certain people, such as those you see listed before a PBS program, a private foundation is a good option.
You can still bunch your contributions to the foundation in one year and benefit from the tax deduction in that year. But you have total say over the actions your foundation takes, including which charities get your money, how much and when.
With any of these strategies, you’ll have to figure out how bunching contributions will impact your cash flow. It may make sense to contact a financial professional for some help with this.
If you find that bunching doesn’t work for you, you can still continue to make your charitable contributions—you just won’t get the tax break. Or you can continue to donate the same amount, take the tax hit and consider that an increase in your gift.
And if all else fails and you decide that you can’t contribute anything, just try to be kind and considerate to others. That helps too.
Brandon Miller, CFP® is a financial consultant at Brio Financial Group in San Francisco, specializing in helping LGBT individuals and families plan and achieve their financial goals.
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