Charitable Contributions: A Brilliant Deduction

November 12, 2019

Whether it be your church, synagogue, or other nonprofit, you probably have a list of charities that you feel passionate about donating to. Surely, your annual contribution to the IRS does not bring that same level of satisfaction. With 2019 rapidly drawing to a close, now is the time take action if you want to maximize both your charitable contributions deductions and the tax benefits.
Despite what you may have heard, there is still a deduction for charitable contributions. In fact, it has been increased to 60% (up from 50%) of your Adjusted Gross Income (AGN). However, you must itemize to claim the deduction. Itemized deductions include medical, state and local taxes (with a $10,000 cap), mortgage interest as well as charitable contributions. Since the Tax Cuts and Jobs Act of 2017 doubled the standard deduction, most people will likely take the standard deduction instead of itemizing, not benefitting from making a charitable contribution. Not so fast. We will show you three creative, yet simple strategies, to make that contribution in a way that will also reduce your tax liability.
The first strategy involves grouping, or bunching, multiple years of contributions into a single year in order to exceed the standard deduction. For this example, let’s say you are married filing a joint return and normally deduct $10,000 in state and local taxes, $4,000 in mortgage interest, and $10,000 in charitable contributions, for a total of $24,000 of itemized deductions. Since this is less than the 2019 standard deduction of $24,400, you would most likely take the standard deduction and derive no tax benefit from your $10,000 charitable contribution. If instead, you doubled your charitable contribution in 2019 to $20,000 and skipped making a contribution in 2020, you would be able to deduct $34,000 in itemized deductions for 2019. Since you are making no charitable contribution in 2020, you would take the standard deduction of $24,800 in 2020. This enables you to deduct $58,800 ($34,000 plus $24,800) from your taxable income over two years instead of just $49,200 ($24,400 plus $24,800). That’s an additional deduction of $9,600, and it did not cost you any more than you would have normally spent.
If the first strategy interests you, but you would rather spread your distributions to charity over a period of years, consider giving to a Donor-Advised Fund (DAF). You would still bunch your contributions as in the first strategy, and take the deduction when you made your contribution to the DAF. But you would then be able to direct the DAF to make contributions to your charities evenly through the year or whenever you wanted.
The third strategy works for those over 70 ½ with IRAs who must take a Required Minimum Distribution (RMD) or face substantial penalties. If this is you and you are planning to make a cash donation to your favorite charity, do not write that check!  Instead, consider making a Qualified Charitable Distribution (QCD). This is a transfer made directly from your IRA trustee to a charity. To qualify for 2019, the funds must leave your IRA by December 31, 2019 and go directly to the charity. You do not need to itemize to take advantage of this strategy. You can give a total of $100,000 from a combination of one or more of your IRAs each year. Among the many benefits of a QCD are:
  • The QCD satisfies the Required Minimum Deduction constraint,
  • The QCD is not added to your Adjusted Gross Income (AGI), and is not taxable.
  • By not increasing your AGI, this could result in lower taxable Social Security and lower medical expense deduction floor.
So, in the spirit of the season, dust off that list of charities and implement one of these strategies to maximize your charitable deduction and reduce your tax burden to the IRS.

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