A PERFECT STORM FOR ITEMIZED DEDUCTIONS
As you all likely know, the Tax Cuts and Jobs Act of 2017 effectively doubled the standard deduction for future tax years beginning with 2018 and simultaneously eliminated and modified some itemized deductions. Now it’s full sail ahead as we approach the final stretch of tax year 2019, and the standard deduction has risen even higher (through inflation adjustments) to $12,200 for individuals and $24,400 for married couples filing jointly. These deductions are further increased for taxpayers age 65 or older or who are blind. These tax law changes are effectively rocking the boats of many of your clients who routinely itemized in the past but are now choosing the standard deduction.
You may be wondering what course correction this might cause for your charitably minded clients. While the itemized deduction allowed for gifts to charity is usually not the sole reason donors across the United States collectively contribute billions of dollars each year, deductions do allow some donors to give more to charity than they might otherwise. This leads proactive advisors to consider what strategies are now available for philanthropic clients to make tax-smart gifts.
First, let’s review the current restrictions in place for most itemized expenses:
- The interest deduction on home acquisition indebtedness is limited to mortgages of up to $750,000 for loans entered into on or after December 15, 2017. Interest on home equity loans is no longer deductible.
- The deduction for state and local income tax or sales tax and real estate taxes is capped at $10,000.
- Miscellaneous itemized deductions subject to a 2%-of-AGI threshold are eliminated. Bucking the cutback trend are the deductions for medical expenses, which dropped to a 7.5%-of-AGI threshold for 2018, and the 60% of AGI limit for cash gifts to charity, an increase from the previous 50%.
Second, let’s talk about some strategies that you can suggest to your clients to help them navigate the stormy seas of these restrictions to itemized deductions.
- Bunching - Donors can accelerate two or three years’ worth of gifts into one year, possibly itemizing every second or third year.
- QCDs from IRAs - Qualified charitable distributions from IRAs by those age 70½ or older offer tax savings, even though no charitable deduction is allowed. To the extent the QCD takes the place of required minimum distributions, the donor avoids income taxes that would otherwise be owed.
- Donor advised funds - UC Berkeley Foundation (UCBF) offers a donor advised fund (DAF) and a donor designated fund (DDF) to which donors can make larger gifts of cash, appreciated securities or real property. A deduction is allowed in the year of the gift, even though donors can wait to make recommendations for particular areas of interest. The minimum gift amount to establish a DAF with the UC Berkeley Foundation is $500,000. At least 51% of the grants must pass to UCBF. A $100,000 minimum applies to gifts to the DDF, with 100% of the distributions supporting UC Berkeley.
- Charitable gift annuities and charitable remainder trusts - Gift vehicles that enable donors to boost deductions while retaining payments for life may be attractive options. These can also be funded with appreciated securities held long term. Payments are based on the full fair market value of the securities. Some donors may enjoy tax-free income or payments favorably taxed at capital gains rates.
- Indirect charitable gifts - A couple, both over age 65 and unable to exceed the $27,000 standard deduction might have an adult child who is able to itemize. For example, a single adult child might have $10,000 in state and local taxes and mortgage interest that puts him or her near the $12,200 standard deduction. The parents could take advantage of the $15,000 annual exclusion to give the child the $5,000 that they normally contribute to charity each year. The child can then make the charitable gifts and save additional taxes by itemizing.