The Tax Cut and Jobs Act has resulted in many changes for 2018. One of the most significant impacts to be felt by taxpayers is going to be with their ability to itemized deductions. One major change regarding itemized deductions is the capping of the deduction of state and local income and real estate taxes to $10,000. For married couples who now get a standard deduction of $24,000, this means that they will need to find a combination of $14,000 in other itemized deductions if they hit the $10,000 cap on state and local income and real estate taxes. Keeping in mind medical expenses cannot be deducted until those expenses exceed 7.5% of adjusted gross income; many taxpayers will not have enough in mortgage interest and charitable deductions in a year to exceed the $24,000 standard deduction amount. This means for millions of taxpayers there is effectively no charitable giving deduction. However, there is a way to maximize the charitable giving deduction by using a donor-advised fund.
A donor-advised fund is set up to allow taxpayers to donate property to it. The donor gets to take an immediate tax deduction for charitable purposes for the full amount of the property donated, but they have the ability to grant those funds over several years to the charitable organizations of their choice. Assume for Tax Years 2018 and 2019 that a married couple has hit the $10,000 cap for state and local income and real estate taxes each year, no mortgage interest to deduct, and gives $12,500 per year to various charities. Under the current rules, they have $22,500 in itemized deductions each year which is below the standard deduction of $24,000. This means that none of the charitable giving will be deductible in either 2018 or 2019. However, if the married couple donated $25,000 worth of property to a donor-advised fund in 2018, they would get to itemize $35,000 worth of deductions in 2018. This will allow the taxpayers to reduce their taxable income by $11,000 more in 2018 resulting in significant tax savings regardless of which tax bracket they fall under. Further, they can grant funds from the donor-advised fund to the charities of their choosing in both 2018 and 2019 (or beyond).
Whenever it is possible taxpayers should be rewarded for their kindness and generosity. There are only a few weeks left in 2018 to act if you think that a donor-advised fund is the right choice for your charitable giving. At Holbrook and Manter, we are prepared to answer any questions you may have regarding donor-advised funds and their tax benefits.