Although only a single change was made to the charitable deductions rules as a result of the Tax Cuts and Job Act (the deduction limit increased from 50 percent to 60 percent), individuals should still consider a tax strategy to maximize their donations.
Because the 2018 standard deduction has almost doubled and the new law limits other common itemized deductions, there is a significant chance that many people who previously itemized will now begin taking the standard deduction. Thus charitable contributions, could potentially have no tax benefit.
It might be that the annual donation amounts given by an individual may not push total itemized deductions over the standard deduction, however the sum of two or more years of total annual donations could increase itemized deductions over the threshold. By “bunching” these donations into one year, a person could itemize in that particular year then take the standard deduction in the “off” years.
If this strategy seems interesting, consider funding a donor-advised fund, a charitable remainder trust or a charitable gift annuity.
The new law did not change the rules for qualified charitable distributions from IRA accounts. Individuals older than 70 ½ can make a tax-free transfer from an IRA to a charity and the donation will count as the required minimum distribution.
This strategy is extremely advantageous as it allows you to make a gift to a charity, which remains tax-free (distribution is excluded from adjusted gross income) and also allows you to take the standard deduction.
Like giving from your IRA, this strategy is advantageous because the donation affords tax savings by avoiding capital gains taxes (any potential gains are excluded from adjusted gross income) that would be due if the asset was sold. Under this strategy, a donor would still qualify for the standard deduction.
This method could potentially be combined with other strategies to get even more bang for your buck. Donated assets are limited to a maximum of 30 percent of adjusted gross income. When this threshold is reached, donors can then consider cash contributions within the 60 percent limit.
Many hospitals, county offices and other non-profit organizations in Kansas offer tax credits for purchase. The credits can be purchased by individuals (or banks) and allow you to reduce or eliminate Kansas State (or privilege) tax liability. While tax credits are often only a percentage (maybe 50% or 70%) of the amount paid for the credit, it allows the funds to go to a non-profit project of your choice and in your community rather than to the State of Kansas or the Internal Revenue Service.
Additionally, while the state tax credits cannot be used against federal tax liability, a taxpayer can deduct the amount paid for the credit as a charitable contribution, if itemizing, on the federal return. Kansas tax credits can be applied whether itemizing or taking the standard deduction.
At K·Coe Isom, we know everyone has a unique tax situation and the new tax law has complicated things more than ever (no postcards here). While any or all of the above strategies may work for you, these are just a few of the items that should be considered. It is important to have a plan in place to minimize your tax liability.
For help planning for year-end 2018 and beyond, reach out to your trusted K·Coe Isom advisor and begin adding up those savings now.
[This article is the second in the series of “Let’s Be Individual” blogs discussing individual tax rate changes and their implications. You can read the first blog in the series here: https://www.kcoe.com/lets-be-individual/.]