With tax reform underway starting in 2018, now may be the last chance for many to maximize their charitable contribution deductions. While the deduction for charitable contributions is preserved in the new tax bill, many fewer taxpayers will actually be able to use it because of the doubling of the standard deduction and fewer allowable itemized deductions. However, taxpayers still have until the end of 2017 to boost their charitable giving and capture the deduction under the current tax code.
Under both the current and new tax code, the charitable contribution deduction is only allowed for taxpayers that itemize their deductions. Along with charitable contributions, other commonly used itemized deductions include home mortgage interest, property, state, and local income taxes, and medical expenses. Typically, a taxpayer would only elect to use itemized deductions instead of the standard deduction when all the itemized deductions added together are more than the standard deduction. For 2017, the standard deduction for married couples filing jointly is $12,700 ($6,350 for individuals). Starting in 2018, the standard deduction for married couples filing jointly is $24,000 ($12,000 for individuals). In addition to the increase in the standard deduction, certain itemized deductions are eliminated or capped (for example, property, state, and local income taxes will be capped at $10,000). Together, this makes it much less likely that a typical taxpayer would itemize deductions going forward.
Although charitable contribution deductions may be more limited starting next year, this does create a planning opportunity for taxpayers in 2017. By making a larger year-end charitable gift this year, taxpayers that expect to itemize their deductions will get a much bigger bang for the buck than if they made the same contribution next year or the following year. Right now, many taxpayers are “prepaying” their charitable contributions for 2018, 2019, and even later years to capture what may be a last-in-a-lifetime chance to get a tax break for giving to their church or favorite charity.
Taxpayers looking to really make an impact in 2017 could look to create a lasting charitable gift through a donor advised fund. A donor advised fund is a unique device used to make a gift that allows the donor to make the charitable contribution now, but retain some control of the funds until later. In the meantime, the assets in the fund are managed by a charitable organization such as a local area foundation. Many brokerage firms also administer donor advised funds.
Once a donor advised fund is established and funded with a charitable contribution, the fund will generate grants to make to charitable organizations. The donor gets to advise the fund administrator as to where the grants should be made on a year-to-year basis. This allows a large gift to continue to grow and make a lasting impact for the donor’s community and preferred charities. The taxpayer can even add more to the fund in later years such as when retiring, income is higher than expected, or when receiving a financial windfall. A donor advised fund can even be the beneficiary an IRA, life insurance policy, trust or estate. By setting up and funding a donor advised fund now, a taxpayer may have more confidence in giving a big year-end gift in 2017 that allows them to capture the deduction while also retaining control and establishing a lasting legacy.
There are donor advised funds in every state, and over 285,000 donor advised funds have been established, including at least 4,700 in Minnesota. Each administrator has a minimum to set up an account and its own schedule of fees. Locally, the minimum to set up a donor advised fund at the Rochester Area Foundation is $10,000.
Whether giving directly to charity or by establishing a donor advised fund, boosting year-end giving for 2017 is a chance for taxpayers to make a move now that will lower their tax bill for this year while making a big impact in the community.
Jason Wagner is an attorney that advises individuals, farmers, and small business owners on estate planning and succession planning while navigating complex income and estate tax rules. He is a partner at Ward & Oehler, Ltd.