Where did my charitable deduction go?
Michael P. McDonough is a partner at Sutton tax firm McDonough, McDonough & Corsini LLP.
When the federal Tax Cuts and Jobs Act was passed in December, the often-rumored-to-be-cut charitable contribution deduction survived. However, the effectiveness of traditional charitable giving for many was greatly reduced or eliminated. Nonprofit organizations are fearful the contributions they depend on to operate and allow them to serve the greater good will begin to dry up.
The Washington, D.C. think tank American Enterprise Institute estimates we will see a $17.2-billion decrease in annual charitable giving due to the increase of the standard deduction. Taxpayers believe with the expansion of the standard deduction they will have to increase their annual charitable contributions by thousands to see any benefit. For some that may be true, but many can continue to benefit from their usual charitable contributions by implementing the following strategies.
Do you own stock?
If you own stock or a mutual fund that has appreciated in value over time, you can contribute these holdings either directly to a nonprofit or to a charitable fund. Why is this an opportunity for you? First, you don't need to pay tax on the appreciation of the stock. If you purchased stock for $20/share and now you own it for $50/share, you can give the stock away and avoid paying tax on the $30 in appreciation. Good news even if you don't itemize your deductions.
Second, you receive a charitable deduction for the fair market value of the stock, which is $50/share in this example. So why is this important if you aren't itemizing your deductions anyway? Let's assume you give $2,500 per year to different charities, but you are still under the new standard deduction. Let's also say you have $10,000 in stock with an original cost of $3,000. If you contribute the entire $10,000 in stock in one calendar year to a charitable fund you will almost certainly be able to itemize and realize a benefit from your contribution while avoiding tax on the $7,000 in appreciation. In addition, you control the charitable fund yourself and continue to donate $2,500 per year to the charities of your choosing – you do not need to give the $10,000 directly to the charity in one calendar year. After four years, you will have given away the same $10,000 to charity, but you'll have saved some potentially significant tax dollars as well. Win, win!!
Are you over 70˝?
Did you know if you are aged 70½ or more, you can contribute money to charity directly from your IRA? This qualifies as a tax-free distribution, which is the equivalent to a full charitable deduction. In addition, the charitable contribution counts toward your pesky annual Required Minimum Distribution.
I am frequently asked by clients whether it makes financial sense to contribute to charity. My answer was always and will continue to be that you should contribute because you care about the cause or the organization you are supporting, but let's work together to make sure we maximize your tax benefit as well. I believe in our philanthropic nature and our desire to make the world a better place, so I'm hopeful charities will continue to see the level of support they deserve. If you are able to implement the above strategies, you just might find your charitable deduction again as well!
Michael P. McDonough is a partner at Sutton tax firm McDonough, McDonough & Corsini LLP. Reach him at mike@mmcllp.com.
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