Making Cents: Tax changes that may impact charities
By: John P. Napolitano, CFP®, CPA, PFS, MST
The USA is the most charitable nation on earth. Is that because we are truly altruistic or is it because of the tax deduction offered to most taxpayers? With the recent tax act, this question will find some clues about the charitable intent of Americans.
In the new tax act, married couples will get a standard deduction of 24,000. For single taxpayers, it will be 12,000. What this means is that every taxpayer in the US will receive this deduction whether they have any itemized deductions or not. This is wonderful for those without a mortgage or any other itemized deductions, such as charitable contributions. But for those who have been charitable in the past, going forward, you may not benefit from the tax deduction you once enjoyed unless it exceeds the 12 or 24 thousand standard deduction.
A few opportunities may exist to get the most deduction for your charitable contributions. One such concept is to bunch your deductions. Bunching means to make your contributions in greater quantity, but likely with less frequency. For example, if your standard charitable contribution is about $10,000 per year, and you have no other itemized deductions, you’ll be unlikely to get a tax deduction for that contribution.
But if you hold off in any given year, and double your contribution in that year, you may have an easier time exceeding the 12 or 24 thousand standard deduction amount and actually receive a tax benefit for the contribution. The charity probably won’t like the plan as it may make their day to day operations difficult if their cash flow suddenly changed. But this can restore some of the tax benefit that you are accustomed to enjoying.
Another option is to use a charitable gift trust. In a charitable gift trust, you can make contributions to an account sponsored by a financial institution that qualifies as a charitable contribution. The donated funds then actually sit in that account until you direct the institution to disburse the funds to your charity of choice. You must distribute at least 5% of the charitable gift trust each year, thus enabling you to continuously fund the charity of your choice without interrupting their business operations or cash flow.
Careful financial forecasting is a good idea to maximize your contribution. You probably wouldn’t be very happy to write a large check now to find out that there was no tax benefit later.
One last option pertains to those of you over age 70 ½ and forced to take required distributions from your retirement account. The tax law still permits you to direct some or up to $100,000 of your retirement distributions, including the required minimum distributions, directly to a charity. Doing this avoids the distribution being counted as income and the charity gets the money. This is actually much better than taking the income and then making a deductible contribution.
As always, this tax act is far from simple. It has added new complexities that tax professionals have never seen. Get help, and do not assume that things are business as usual.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.