If you want to slash your 2018 tax bill, consider giving away some of your wealth.
The new code also did away with personal exemptions and placed limits on certain itemized deductions, including a $10,000 cap on state and local tax deductions.
These developments mean that fewer people are expected to itemize on their 2018 taxes.
Enter a strategy for filers who are just short of the new standard deduction: “Bunching” or lumping multiple years of charitable gifts so that you can beat the hurdle and itemize on your tax return.
“The problem with bunching is that it requires writing a bigger check this year, and that extra cash flow might not be available.”
“Bunching is applicable to that subset of people who want to make sure they’re getting tax benefits from giving and maybe their itemization with some of their deductions have been limited,” said Kim Laughton, president of Schwab Charitable.
She said that, for the calendar year through September, contributions to the firm’s donor advised funds — tax-favored accounts that donors can use to make charitable gifts and then direct grants — are up by 35 percent from the prior year.
Here’s what you need to know about making large charitable gifts.
Bunching charitable gifts allows donors to cram two or more years’ worth of donations into a single tax year in order to get over the standard deduction threshold and qualify to itemize on their 2018 tax returns.
Consider Schwab Charitable’s example below.
Susan and Jeff are married and have no kids. They normally have $23,000 of itemized deductions each year — $13,000 of state and real estate taxes, and mortgage interest, plus $10,000 of charitable donations.
This means they were eligible to itemize on their 2017 taxes, but won’t be able to in 2018 — unless they give aggressively. See below.
The larger gift allows Jeff and Susan to gather $33,000 in itemized deductions for 2018.
In 2019, they’ll take the standard deduction when they file for that year.
Not for everyone
Grouping multiple years of charitable donations may have its tax-saving upside, yet few filers are aware of it as a strategy.
Seven out of 10 individuals who itemize on their tax returns haven’t heard of bunching their deductions, according to a survey by Fidelity Charitable.
In May, the company polled 475 people who gave to charity in the last two years and have filed itemized returns.
Filers might also be uncertain as to whether they benefit from cramming at least two years’ worth of gifts into 2018.
For instance, 58 percent of the 3,000 individuals surveyed by Fidelity Charitable in June said they expect to itemize on their returns this year.
“If you look at their income levels, itemizing probably won’t make sense for them,” said Amy Pirozzolo, vice president at Fidelity Charitable.
“I think people haven’t dived in deeply enough with their advisor when it comes to thinking about their taxes,” she said.
Another potential hurdle: Donors might also blanch at the idea of writing a large check up front.
“The problem with bunching is that it requires writing a bigger check this year, and that extra cash flow might not be available,” said Tim Steffen, CPA and director of advanced planning at Robert W. Baird & Co.
Those individuals might hold off until January as far as making those gifts, he said.
“It’s easier to delay the contribution than to accelerate it,” Steffen said.
What works for you
Before making an outsized donation to a charitable cause, talk with your CPA or financial planner to determine the best way to go about it. Here’s where to begin.
What’s my filing status after the tax overhaul? If you’re far below the standard deduction of $12,000 (single) or $24,000 (married joint filers), a large charitable gift may not be enough to get you over the threshold to itemize.
Which assets are the best to donate? Cash may be the easiest thing to give, but if you’re holding highly appreciated investments, consider donating those instead.
If you sell your stock and donate the cash, you’ll be on the hook for capital gains taxes when you liquidate. By giving the stock directly to charity, you avoid the capital gains tax hit.
What’s the best way to give? Donor-advised funds have multiple upsides: They can take a variety of investments, and they aren’t required to distribute a certain number of assets each year the way private foundations are.
That doesn’t mean it’s the best way for you to give. For instance, if you want to put your money to work immediately, it might make better sense to give directly to your charity of choice.
“Donor-advised funds are best used for donors who want the tax benefit today, but who don’t want to give the money to charity just yet,” said Steffen.
Talk about your goals with your financial advisor and determine a charitable giving strategy that works for you.