Southfield, Mich.—December 9, 2019—All is not lost in terms of receiving tax benefits for charitable giving, according to Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace. Even though new tax law changes in 2018 made it more difficult to receive a tax benefit, shareholder and CPA Margaret Amsden, who heads the firm’s domestic tax strategies for clients, affirmed there are approaches taxpayers can use when contributing to charitable organizations.
“As a result of the TCJA changes, the average person lost the benefit of their charitable contributions,” Amsden said. “Before 2017, a married couple filing jointly could itemize deductions if their total itemized deductions exceeded $12,700, but now that threshold is $24,000. Also, the TCJA limited the deductible taxes to $10,000, making it even harder to itemize. Subsequently, there was a 50% decrease in the number of taxpayers who were able to itemize and maximize their charitable tax advantage.”
So, what are the options outside of standard itemizing?
Amsden outlines two scenarios:
Option 1: Donor Advised Fund (DAF)
A Donor Advised Fund (DAF) is essentially a tax-deferred investment account where:
- The taxpayer takes a deduction when the account is funded, thus accelerating the deductions.
- The taxpayer can pay the amount out to their charities of choice over a period of years.
- The money grows tax free in the account.
- The taxpayer can name a beneficiary to take over the charitable giving in the case of death, while there are still assets in the account.
Amsden said the reason a DAF works is that the acceleration of multiple years of charitable contributions allows the taxpayer to exceed the threshold to itemize in the first year, and then take the standard deduction in future years—thus, losing fewer deductions cumulatively.
Option 2: Diverting Required Minimum Distributions to Charity
Taxpayers older than 70 ½ years of age have a requirement to take Required Minimum Distributions (RMD) from their Individual Retirement Accounts (IRA), and they can direct those RMDs directly to a charity of their choosing up to $100,000 of RMDs per year. Plusses of this approach include:
- The taxpayer’s gross income is reduced by the amount redirected to the charity.
- The taxpayer does not need to qualify to itemize their deductions to receive the benefit of the contribution.
- The taxpayer can make the election annually, but should do so prior to taking their RMD. This creates the largest benefit because the taxpayer gets the full benefit every year without any loss of deductions.
“It makes sense to learn more about how to take advantage of these planning techniques because it’s a win-win for the charities and those making the donations,” Amsden said. “An accounting firm can help taxpayers determine their best individual approach to maximize tax benefits.”
About Clayton & McKervey
Clayton & McKervey is a full-service CPA firm helping middle-market entrepreneurial companies compete in the global marketplace. The firm is headquartered in metro Detroit and services clients throughout the world. To learn more, visit claytonmckervey.com.