When the Tax Cut and Jobs Act went into effect in January 2018, many taxpayers stopped itemizing their returns. The reality, however, is not necessarily black and white. Unique tax situations require a unique approach, and there may be some room for improvement in yours. Now that 2020 is in full focus, it is a great time to look at your giving strategy. If you are not sure you made the most of your charitable deductions in 2019, we have some advice on how to make sure your donations count this year.
Although taxpayers that fall just below the standard threshold no longer need to itemize, those who hover around a higher tax bracket or well-exceed the standard deduction threshold should consider their situation with a professional to determine if they could benefit from a better plan. Consider these incentives,
- Tax Reform removed the Pease limitation for itemized deductions and increased the amount of cash that can be contributed to public charities from 50% to 60% of adjusted gross income (AGI). For the tax years January 1, 2018, through December 31, 2025, taxpayers can claim 100% of their allowable itemized deductions.
- Taxpayers whose income falls short of the standard deduction threshold one year but exceeds it in other years could consider a bunching strategy. This allows those who fall below the deduction threshold to maximize the tax benefits of giving every other or every third year.
- Donor-Advised Funds (DAF) are another excellent way for taxpayers to claim a larger deduction. It works like this; the itemized donor gives an initial, more substantial gift to a donor-advised fund and receives the allowable tax deduction. The contribution grows tax-free and serves as a charitable fund from which the taxpayer can recommend gifts to charity in subsequent years. These recommendations do not qualify as additional deductions, leaving the taxpayer to take the standard deduction in those years.
- Under the new tax law, donors can still take an income tax deduction on the full fair market value of appreciated assets they gift to charity. This scenario is a win-win for taxpayers and charities.
- Taxpayers 70.5 years of age and older can request a distribution of up to $100,000 per year directly from their IRAs to charity. This gift helps satisfy annual required distributions and is removed from the donor’s taxable income.
When deciding on which charity to support in 2020, the Internal Revenue Service makes it easier than ever. The key to making your donations count is ensuring the organization you choose is an eligible charity. The Tax-Exempt Organization Search engine and the Interactive Tax Assistant on IRS.gov can help you choose organizations eligible to receive tax-deductible charitable contributions.
If you’re worried that making a large gift this year will harm your estate after 2025, you can rest easy. In November 2019, the Treasury Department and IRS issued final regulations confirming that taxpayers who make significant contributions between 2018 and 2025 can take advantage of the increased gift and estate tax exclusion amounts without concern over losing the benefit in 2026 and beyond.
The professionals in our office are well-versed in charitable contribution strategies. We invite you to give us a call today so you can get off to a great start in 2020.