Americans are known for being some of the most generous people on Earth. In fact, according to the CAF World Giving Index, the US was the most charitable nation over the past decade.1 Since the stock market is near record highs, unemployment is low, and the US economy continues to grow; it would be expected for the giving trend to continue. However, at first blush this may not be the case. Despite the strong economic environment charitable giving by individuals declined 1.1% from 2017 to 2018 (3.4% when adjusted for inflation).2 So what gives? While one year of decline isn't a trend, there may be another culprit to explain why this might not be a fluke.
Tax Law Changes
Although it's estimated that nearly 65% of people paid less tax due to the new tax laws, this was not because of charitable deductions.3 When filing your taxes each person (or joint couple if married) is allowed to take the larger of the standard deduction or aggregated total of itemized deductions. Itemized deductions include state taxes paid, mortgage interest, and charitable giving among other things. One big reason why the new tax law has made charitable giving less valuable from a tax perspective is because the standard deduction essentially doubled. In 2019 the standard deduction is $24,400 for joint filers and $12,200 for single. This means that your total itemized deductions need to exceed this threshold in order to provide a tax benefit.
Another reason is that the itemized deductions you can take have been reduced. For starters, the tax law changes completely eliminated miscellaneous itemized deductions which included things like safe deposit box rental, tax preparation fees, casualty and theft losses, among many others. On top of that, for those who live in high tax states (or those who live in NH but work in MA), the state tax deduction is limited to $10,000 regardless of whether you file joint or single. These changes reduced the amount of people able to itemize deductions from about 46.5 million in 2017 to 18 million in 2018.
How can you maximize your charitable giving?
Regardless of whether you get a tax benefit from making charitable donations, we still strongly suggest making them because it's good for society. However, as financial planners we're always looking at the financial side of things. If we can find a way for you get a tax benefit, that's just icing on the cake. Even with the tax changes there are a few ways to optimize your charitable giving.
1) Qualified Charitable Donations (QCDs)
If you're over the age of 70.5 and have an IRA you can give up to $100K to charities tax-free every year. In addition to that, the money you give also counts toward your Required Minimum Distribution (RMD) for the year. If you find that you don't need all your RMD money to live on, giving a QCD can provide an additional tax benefit.
It's important to note that the money must go directly from the IRA to the charity in order to qualify. If you take the money out of the IRA and then decide to give money to charity, your charitable donation would be considered an itemized deduction subject to exceeding the standard deduction. Also, QCDs are only allowed from IRAs. If you haven't moved your 401(k) or other workplace plan to an IRA, you also cannot make a QCD.
2) Donate Appreciated Investments
Another way to get a tax benefit, even if you can't itemize deductions, is to donate an investment that has increased in value. As many know, if you sell an investment like a stock or mutual fund for a profit you will owe capital gains taxes on it (typically 15%). However, charities don't pay taxes, so if they sell something for a gain, no tax is due. That's why if you're planning on giving money to charity it's better for you to give them appreciated investments rather than cash. If you sell the investment you get taxed on it, but if you give it directly to a charity, you don't owe any tax and they won't either.
3) Open a Donor Advised Fund (DAF)
Ever since the tax law changed, donor advised funds have been getting a lot more attention. First, you can donate appreciated investments directly to a DAF, just like you can to any charity. Secondly, you can also implement a giving strategy often called "bunching." “Bunching” allows you to aggregate multiple years of planned charitable deductions into one year, so your deductions exceed the standard deduction, but allows you to spread the gifts to charity over multiple years. For more information on donor advised funds, and how to maximize their use, you can read our other post explaining them here.
Charitable giving may have been down in 2018, but that doesn't mean there still aren't great ways to help charities you care about and still get some tax benefits in the process. Being creative and flexible with your giving can still save you some tax dollars. If charitable giving is something you're interested in, and you would like to explore your different options, we suggest speaking with a financial advisor to review the pros and cons of each strategy with you.