Charitable Giving After Tax Reform

Starting in 2018, changes to tax code made the standard deduction a more appealing option for many Americans. One side effect of this? Taking the standard deduction meant losing the tax benefit of charitable donations since they require you to itemize deductions on your tax returns.

What you may not realize, however, is that with strategic tax planning, you may still be able to realize some tax benefits from your charitable giving. Here’s how.

A Quick Recap on Deductions

When you file a federal income tax return, you generally decide between two options: the standard deduction or itemized deductions. If, when you itemize all of your various deductions, the amount adds up to less than the standard deduction, there’s no monetary incentive to itemize. (There are some situations where you are required to itemize.)

After Congress increased the standard deduction as part of the Tax Cut and Jobs Act (TCJA). It also reduced or altered some commonly used deductions. While the charitable deduction remains, there can be less incentive to itemize.

Itemizing and Charitable Contributions

If your donations to charity would push your total itemized deductions above the standard deduction amount, you receive a tax break.

Consider a married couple, both age 65, that total itemized deductions (other than charitable contributions) of $30,000—which is larger than the standard deduction for married couples filing jointly in 2024.

If they are in the 24% income tax bracket and make a charitable contribution of $10,000, they would reduce their income taxes by $2,400 ($10,000 charitable deduction x 24% tax rate).

However, it’s not always that straightforward.

Folks hoping to make significant charitable contributions may rely on the donations themselves to push their itemizable deductions past the standard deduction threshold. In that case, donation bunching may be a tax strategy to consider.

Donation Bunching

If you donate to charity every year but lose out on the benefit due to the standard deduction, you might consider grouping (or bunching) multiple years worth of donations into a single year.

For instance, if that same married couple had no itemized deductions other than charitable contributions, donating $10,000 a year wouldn’t help them from a tax perspective.

However, if they set $10,000 aside the first year (perhaps in a high-interest savings account), then $10,000 the following year, and combined it with their $10,000 donation in year three, their $30,000 donation would put them over that $27,700 threshold and help reduce their tax bill.

Of course, there are a few things to consider with this strategy.

First: The amount of your income tax charitable deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 20% or 30% of your AGI.

Second: Even with donation bunching, donating cash may not be your savviest move. If you donate appreciated stock, for instance, you avoid paying any capital gains tax on the contribution. You could also consider contributing your bunched funds to a donor-advised fund (DAF) instead, which can help ensure your gift has a lasting impact.

Qualified Charitable Distribution (QCD)

If you are older than 70½, you can use your IRA to help you give back. Rolling funds from an IRA directly to a qualified charity is called a qualified charitable distribution (or QCD). With a QCD, you don’t pay income tax on the withdrawal. Plus, QCDs can count toward any required minimum distributions.

The distribution must be one that would otherwise be taxable to you, and there are some restrictions in place. The IRS updated these rules in 2023, so check with your tax advisor to ensure you’re maximizing the potential benefit. (For instance, you may now be able to contribute a portion of your QCDs to a dual-entity, such as a charitable-remainder trust for a period of time, so long as you follow strict IRS guidelines.)

A tax or financial professional can also help ensure the proper paperwork is filed to avoid any complications with the IRS.

If you have questions about your own charitable giving, or how to minimize your overall tax liability, speak to a Bogart Wealth Advisor.

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