Much has been written about the tax reform legislation that was passed in late December and went into effect Monday, January 1 2018. And whether you love it or hate it, the Tax Reform and Jobs Act could have a significant impact on charitable giving and the nonprofit sector.
While we know that tax breaks aren’t the main reason that you give, economic studies show that tax deductions for charitable gifts increase philanthropic giving. Removing them could significantly reduce charitable donations. In fact, a report from the Tax Policy Center1 estimates that individual giving would decline by between $12 and $20 billion in 2018.
So what’s the charitably-minded and tax-savvy donor to do? This year, if you want to boost your tax savings beyond the new standard deduction, consider giving away some of your wealth. Filers who plan their charitable gifts may be able to get themselves over the new standard deduction and itemize — if they use a strategy called “bunching2.”
With bunching, you give the same amount of charitable donations that you normally would over a two-year period, but you bunch them into one year. Here’s how it works:
Let’s say you’re a married couple that claimed $8,000 in state income tax deductions, and you also paid $6,000 in mortgage interest in a year. You would need at least $10,000 in charitable gifts to hit – and surpass – the $24,000 standard deduction threshold.
But, if you and your spouse normally give $5,000 a year to your favorite charitable organizations and other nonprofit entities (like your church), you can accelerate your giving by cramming two years of donations into one tax year. With bunching, you itemize on your taxes one year, and take the standard deduction the next.
Now that you know what bunching is, you’re probably thinking 1 of 3 things:
- I can’t possibly afford to double my charitable giving just for the tax deduction. This bunching thing just won’t work for me. (Totally understandable. Bunching is not the right option for everyone, but we’re still glad you stopped by to check out our blog!)
- Wow, great advice! Thank you! (It is. And you’re welcome!)
- I see where you’re going with this… but my favorite charities depend on my annual support. I still want to be able to donate annually so that my gift remains dependable. (We completely understand! And do we have a solution for you!)
For those readers in camp #3, who like the concept of bunching but still want to provide annual support to the organizations that count on you for a yearly gift, why not consider starting a donor advised fund at the Community Foundation?
A donor advised fund is an account dedicated to holding charitable dollars until they are distributed. You can give either cash or appreciated investments to the fund and take a tax deduction for that full contribution amount in the year you make the gift. Then, you use the fund’s assets to give to charities of your choice over time. And when you create a donor advised fund at the Community Foundation, you get the added benefit of community knowledge and philanthropic expertise from the foundation team. Win, win, and win!
The bottom line: generosity is a constant in our society. We are confident that next year and beyond, Hoosiers in Allen County will continue to support things that matter to our community. At the same time, tax policy matters. We encourage you to talk with your financial advisor about how you can maximize your charitable giving under the tax reform legislation and maximize your philanthropic impact in our community in 2018.
1.http://www.taxpolicycenter.org/taxvox/house-tax-bill-not-very-charitable-nonprofits