How to give wisely under the new tax law

Itemizing deductions may no longer make sense, so it’s time to take a fresh look at how you donate to charities.

Because of the federal tax law that took effect last year, it may no longer make sense for you to itemize deductions. That means you may not be able to use charitable contributions to reduce what you owe to Uncle Sam. 

“A whole host of folks will be taking the standard deduction now who never took it in the past,” says Craig Richards, a managing director at Fiduciary Trust in New York City. Two reasons: the standard deduction has nearly doubled, to $24,000 for couples and $12,000 for individuals; and while you could previously deduct all of your state and local income and personal real estate taxes on your federal return, you can now deduct no more than $10,000 of those taxes. With that limit, a couple would need more than $14,000 in additional write-offs for itemizing to make sense. 

Fortunately, there are still tax-advantaged ways to donate to charity. Here’s a look at two of them. 

Combine Several Years’ Donations 

One method is to lump your donations: instead of giving to charity annually, give what would have been several years’ contributions in one year so that the total is enough for itemized deductions to make sense.

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Where once a family foundation was the answer for folks who wanted a long-term, multi-generational vehicle to give away money, donor-advised funds are increasingly more popular. That’s because they don’t require you to file regulatory documents, cost less to administer, and offer more flexibility, says Jennie Sowers, a partner at Kore Private Wealth in New York City. In addition, unlike foundations, donor-advised funds don’t need to donate a certain amount each year. So you can make the gift and take the itemized tax deduction now while waiting until future years to actually disburse the money from the fund to charities.

One client couple was planning to start a family foundation so their children could use it to make grants jointly, Sowers says. But the children, who are in their 20s and living on separate coasts, didn’t want the substantial responsibility of managing a foundation. The family realized they could accomplish the same goals by starting a donor-advised fund and letting the children each make grants with a portion of it, Sowers says. 

Donor-advised funds are held at Vanguard, Fidelity, and other asset-management firms. The money you put into them no longer belongs to you, but you can advise the fund on how to invest it and generate returns that will themselves be contributed. You can also advise the fund on where it should make contributions. Any 501(c)(3) nonprofit is eligible to receive donations from these funds. 

At Vanguard Charitable, the asset-management firm’s donor-advised-fund division, dollars contributed in November 2018 were double the previous November’s total, says Jane Greenfield, the unit’s president. Donors are also rushing to gift shares of private companies into their donor-advised funds, she says. 

If you set up a donor-advised fund or make donations into an existing fund, note that there are limits to how much you can deduct from your taxes. The maximum deduction is 60 percent of your adjusted gross income when you gift cash into a donor-advised fund and 30 percent when you put long-term appreciated assets like stock into one of these funds. 

Donate IRA Distributions

Another increasingly popular strategy under the new tax law is donating the amount you’re required to withdraw from your individual retirement accounts when you reach age 70½, Richards says. You can contribute up to $100,000 from an IRA’s required minimum distribution directly to a charity. This is called a qualified charitable distribution, and it doesn’t create a tax deduction; rather, the money is never taxed, Richards says. (You can’t donate from your IRA into your private foundation or donor-advised fund without paying taxes; only public charities qualify as recipients.) 

IRA holders over age 70½ who donate the required minimum donation from an IRA directly to an eligible charity—a qualified charitable distribution—don’t have to worry about meeting a threshold for itemized deductions. This sort of distribution means the money donated does not add to your adjusted gross income. That can help you avoid a Medicare surcharge or make less of your Social Security income taxable. By contrast, if you take a regular distribution without donating it directly to a charity, the money will count as part of your adjusted gross income, even if you later donate it to charity, Richards says. 

“If you’re going to give more than your required minimum distribution, the calculus is different, but up to that amount, it’s very powerful,” says Jonathan Rikoon, a partner at the law firm Loeb & Loeb in New York City, who handles trusts and estates. 

One client recently gave the first $100,000 of his required minimum distribution to the U.S. Holocaust Memorial Museum, Sowers says. “To be able to shield a portion of that [IRA distribution] for people who are charitable anyway…that’s just a very powerful tool.”