Obtaining a charitable deduction under the TCJA will be more difficult to achieve for many taxpayers. According to one reliable estimate only about 18 million households will itemize, down from 46.5 million households in 2017. One must itemize deductions to get income tax relief and under the Tax Act the bar has been raised by the nearly double Standard Deduction. Under the Tax Act an individual is able to itemize deductions that exceed $12,000, up from $6,350 in 2017. Married couples may itemize if deductions exceed $24,000, up from $12,700 in 2017.
Here are some ideas that may help achieve a charitable deduction:
- Charitable Bunching, Stacking or Lumping. By “bunching” greater charitable gifts every other year taxpayers may be able to itemize deductions in those years when their donations push itemized deductions over the Standard Deduction. Combine this strategy by donating to an established Donor Advised Fund and one will still be able to fund charitable activities annually despite having made charitable gifts every other year.
- Charitable Remainder Trust and Bunching. For those who wish to gift to charity and retain income the Charitable Remainder Trust (CRT) continues to be useful and combines the “bunching” strategy. Typically CRTs are funded with significantly large gifts and will likely result in deductible charitable gifts that exceed the Standard Deduction. Such gifts are deductible in the year gifts are made plus an additional 5 year carry forward.
- Qualified Charitable Rollovers. Those over age 701/2 may transfer a charitable gift directly from their traditional IRA to a qualified charity. Income is not recognized and itemization of deductions is not necessary for this tactic to work.
- Donate Appreciated Assets. Many taxpayers donate appreciated securities, real estate, artwork to avoid incurring capital gains tax had they sold such items individually.
IF YOU DO ITEMIZE Deductions, you should know that:
- Gifts of cash are deductible up to 60% of Adjusted Gross Income (up from 50%)
- Gifts of stock remain deductible up to 30% of Adjusted Gross Income (same as before)
Charitable Gifts to Reduce Estate Tax. Although the federal estate tax exemption has risen dramatically from $5,490,000 to $11,180,000 (but due to sunset in 9 years) the Minnesota exemption for 2018 is comparatively low at $2,400,000. In 2019 the MN exemption increases to $2,700,000. In 2020 it increases to $3,000,000 with no further indexing. Charitable gifting within the estate plan can still be useful in reducing MN Estate Tax. It can take the form of a one time, direct gift to charity in a Will or Trust. Life insurance, annuities, and traditional IRAs may become payable to charities or Donor Advised Funds. Fiduciaries may be directed to fund Charitable Remainder Trusts reserving income streams for survivors with principal ultimately passing to charities or Donor Advised Funds.