This article is part of the Professional Advisor Insights series.
Two important rules in the Tax Cuts & Jobs Act (TCJA), enacted in late 2017, affect your ability to deduct your charitable donations. Planning under these new rules can help you get the biggest bang for your charitable buck.
It’s important to understand that you may only benefit from deducting your charitable donations if you itemize deductions on your tax return. According to Urban-Brookings Tax Policy Center, only 28% of taxpayers itemize.
The new rules change the 2019 standard deduction to $12,200 for individuals and $24,400 for couples. So, total itemized deductions must exceed those amounts in order to benefit from itemizing deductions.
Another new rule limits the amount you can deduct for state and local taxes, such as property taxes, to $10,000. This change can affect those of us living in high tax states, such as California.
Put these two changes together and we find that many more taxpayers will likely use the standard deduction rather than itemize. Those who use the standard deduction lose the write off for charitable donations.
Plan Ahead to Maximize Your Charitable Donations
What should you think about doing in order to continue to get a tax benefit for your charitable good nature? Consider “bunching” your charitable donations. Here’s how this planning strategy works:
In this example, let’s assume a couple typically donates $4,000 to charity each year and in 2019, they will have the following expenses:
- $10,000 state and local taxes
- $6,000 home mortgage interest
- $3,500 medical expenses (the amount over 10% of adjusted gross income)
- $4,000 charitable donations
The total of these items is $23,500 — less than the $24,400 standard deduction. So, they claim the standard deduction and will not itemize. In other words, they will deduct $24,400 regardless of the $4,000 they donated to charity.
Different Timing, Same Amounts
So, instead of donating $4,000 in a single year, consider “bunching” your donations by making two $4,000 donations, for a total of $8,000 in 2019. And, make no donations next year in 2020. Using the same example above, an additional $4,000 would put them over the standard deduction and they would itemize. Next year they might not itemize. The same “bunching” strategy would be repeated every other year.
Only the timing of the donations changes. The amounts stay the same.
Most people donate to charity because they believe in the cause and not just for the potential tax benefits. So, you don’t need to change the level of your support, just think about “bunching” your giving to get the bigger bang for your charitable buck. Consult your own tax advisor for what is the best strategy for you.
About Paul Hynes, CFP®
Paul Hynes, CFP® is a Certified Financial PlannerTM Professional and President of HearthStone | Private Wealth Management – an independent fee-only financial planning and investment management firm with offices in San Diego, Irvine and Temecula, California. Paul can be reached at 858-792-9122 or firstname.lastname@example.org. HearthStone is a Registered Investment Adviser. More information at www.hearthstoneinc.com.