Personal Finance

The 2017 Tax Cut and Jobs Act makes significant changes to the tax code that will impact many taxpayers. While the tax act’s main beneficiaries are corporations (a single 21% corporate tax rate now applies), individuals may also benefit from lower rates and a higher standard deduction.

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Perhaps the single biggest change for individuals is a $10,000 cap on state and local tax (SALT) deductions. Taxpayers in states with high income taxes and high real estate property taxes — like New York, New Jersey and California — will be most affected. The Tax Policy Center estimates this change will reduce the number of taxpayers who itemize from 37 million to about 16 million. Capping the SALT deduction may have a ripple effect for some taxpayers — meaning their previously itemized deductions (including charitable deductions) won’t exceed the new standard deduction.

For taxpayers who have a history of making charitable contributions, making sure those contributions have maximum tax benefit may require some additional planning. Let’s review some strategies that could help minimize your tax bill while also helping to do good.

A Chunky Way to Give to Charity

The first strategy involves “chunking” two years of charitable deductions into one tax year. By making charitable contributions in January and December of the same year (think of the December contribution as paying one month in advance), taxpayers may be able to claim itemized deductions in the year of their charitable gifting and take a standard deduction in the alternate year. This need not change one’s gifting level, merely the timing.

Another Helpful Way to Give: Donor Advised Funds

A slightly different method to take advantage of the “chunking” strategy is to again make multiple-year charitable gifts in one tax year, but this time via a donor advised fund (DAF). Contributors to DAFs receive a tax deduction in the year of contribution, while retaining control over the timing of the distribution to the charity of their choice. To illustrate, John & Mary Smith gift $25,000 of appreciated stock to a donor advised fund with their area community foundation in 2018 and deduct this charitable contribution on their 2018 tax return. John & Mary can make distributions from their DAF to support various charities of their choice, perhaps over the next several years.

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Finally, You Can Tap Your IRA

Finally, another strategy only available for taxpayers over age 70½ and involves making a qualified charitable distribution (QCD) directly from one’s IRA. A QCD counts towards one’s required minimum distribution (RMD) but is not included in taxable income on the tax return. This strategy results in the taxpayer getting the benefit of the charitable contribution (through lower income) irrespective of whether they itemize deductions.

As with any tax strategy, one needs to consult a tax professional on whether certain strategies apply to their specific circumstance. The good news is with advance planning you can make the new tax law work to your benefit.

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Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.

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