Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Year end is usually the peak of charitable giving, but the new tax laws may change how you give. Joining me to discuss that topic is Tim Steffen. He is director of advanced planning for Baird.
Tim, thank you so much for being here.
Tim Steffen: Thanks, Christine.
Benz: Tim, let's talk about the major changes in the tax code that affect maybe not directly but certainly indirectly the charitable giving scene.
Steffen: There's been a lot of talk about the impact on charitable giving. If you look at the rules that changed directly on charitable giving, they actually really expanded giving. They raised the amount of income you can offset if you give a lot of cash to charity. Used to be 50% of income; now, you can offset up to 60% of your income. Now, most people who give that much money to charity, probably aren't doing it with all cash. They are usually using appreciated stock or something like that. Those rules haven't changed. It's still 30% of your income you can offset if you are giving to a public charity like a church or a school or United Way or something like that.
In general, the rules specific to charitable giving have actually expanded a little bit. The problem is that other rules have changed which is going to make it harder to actually get a tax benefit for those charitable gifts.
Benz: Let's talk about that. There's a higher standard deduction. That's the biggie I would imagine.
Steffen: That's one of the big ones, yeah. The standard deduction, the flat amount that everybody gets based on your filing status and that's kind of your floor on deductions, you're never going to go below that …
Benz: So, that's what, $12,000 for …
Steffen: For singles and $24,000 for couples. And then, if you are over 65, you actually get an additional deduction. It can actually be for a married couple over 65 could be almost $27,000. It could be a little bit bigger. That's your floor of deduction. So, if your itemized don't exceed that, you really don't get a benefit for those itemized deductions. That's things like state taxes and mortgage interest and medical expenses and charitable giving and all of that.
With some of the other changes on the deductions, the cap on the state tax deduction …
Benz: Which is $10,000 …
Steffen: $10,000 now, right. It used to be unlimited. So, now, it's only $10,000. If you are at $24,000 standard deduction, you can only use $10,000 of taxes to help you get over that. That means things like your mortgage interest and your charitable gifts have to be at least that other $14,000--for a married couple--before you start to itemize. If you paid off your mortgage and you don't give a lot to charity, you're probably never going to get over that $24,000 numbers.
Benz: The preliminary estimates are that many fewer of us will be itemizing than in the past.
Steffen: It was actually a little bit surprising. If you look at the historical numbers, about 70% of people really took the standard deduction in the past. That's expected to go as high as 90% with some estimates. The other way to think about that is, only about 1 in 10 taxpayers is really going to get a benefit for their charitable contributions now from a tax standpoint.
Benz: On the plus side, things are maybe a little bit simpler. We don't have to save all those receipts. But say, you are someone who does have significant charitable intentions. You like to give to charity, let's talk about a strategy-you sometimes hear it's called charitable clumping or bunching--a strategy that can help you potentially get a tax deduction.
Steffen: So, if you are someone--again, go back to that $24,000 standard deduction--if you are somebody who gives money to charity, but you are never quite able to get over that $24,000 with your annual giving, maybe you do some timing of the giving, moving charitable gifts out of one year and into another so that you can get yourself over that standard deduction. Here we are at the end of 2018, instead of making more gifts now, maybe you push those gifts into 2019, double up in that year or bunch the deductions as the term that a lot of people use. Or because it's kind of late in the year, you may have already done a lot of giving this year, maybe you look at accelerating your 2019 gifts in 2018. That way you get yourself over the standard deduction this year, and then next year, you fall back below the standard. You can do that on an every-other-year basis if you like. Some people do it every three years; whatever works better for you from a cash flow standpoint.
This bunching deduction--I have had people ask me about this--I didn't see that in the tax law. Bunching has been around forever. This is nothing new. It's just that now with some of these changes, there's really more opportunity to take advantage of it.
Benz: It's not just charitable contributions necessarily that you are bunching. If you have some big healthcare procedure planned that's going to cost you a lot of out-of-pocket costs, you could tie that in?
Steffen: Exactly. The whole point is, you got to get over that standard deduction number of $24,000 or whatever it is for you. So, the easiest thing to control is your charitable giving. You can't really control your taxes or your mortgage interest. Medical, you can control to a certain point, but you are not looking to create medical expenses necessarily. Charitable is the one you have the most control over. So, that's the one people look at with the bunching technique.
Benz: I know that some charities have been concerned that this would reduce their intake from donors or potentially make their finances a little lumpier. And so, there are what are called donor-advised funds that people can use. Let's talk about that.
Steffen: Donor-advised funds can be a great way when used in combination with this bunching strategy. We've talked before, what if you took all your 2019 gifts and moved them into 2018? Now, you may not necessarily want to give all that money to charity right away because you don't know who you want to give it to. There's a technique called as donor-advised fund, where you can put the money into the account today, you get the tax benefit today. But then, over time, you can decide where to send the money to. It's kind of like a private foundation for people who don't want to do million-dollar and plus gifts. These are for people who want to do smaller giving but still want to have some control over the timing of the tax benefits versus when they actually hand it over to charities.
Benz: You set it up directly with your financial provider. Most of the big firms do have in-house donor-advised funds.
Steffen: Exactly. So, you've got a couple of different options that you can go direct to a lot of them, major mutual fund companies have them, a lot of your local community foundations will have them as well. You can go through your advisor and get it set up that way. Look around, they are all a little bit different, they are all going to have different minimum contributions. It typically range from about $5,000 to $10,000 initially, maybe $1,000 or so ongoing contributions into the fund. Then in terms of donations out, some of them get as low as $50 that you can send out to a particular charity which is pretty nice.
There's going to be some expenses associated with that. So, it's easier than a foundation, requires a lot less capital, but it may have some extra costs to it, too. So, just make sure you understand your options.
Benz: Let's discuss the qualified charitable distribution, which is available for people who are subject to required minimum distributions. Let's talk about what that is and who should consider it.
Steffen: The qualified charitable distributions have actually been around for a while. It's one of those that's kind of come in and out of the tax law many times. It is now a permanent thing. So, we don't have to worry about it going away. It's permanent as any tax law is these days, right? But it's a permanent part of the tax code now. It allows people who are aged 70 1/2 or older at the time of the gift to take a distribution directly from the IRA to a charity. It can't filter through you; you can't use it to reimburse yourself for a gift you previously made. It's got to go direct to the charity from the IRA trustee.
Benz: You can do up to $100,000. For a couple potentially you could double that assuming your RMDs were large enough?
Steffen: Each IRA owner can give up to $100,000 during the course of the year. So, a married couple could each move $100,000. It's got to come out of their own IRAs. So, if one spouse doesn't have an IRA, they can't do a QCD. But yeah, you can give up to $100,000.
The other great thing is, because at age 70 1/2 you are subject to the RMDs, this can actually count as your RMD. So, rather than your IRA trustees sending you a check for RMD each year and then you turning around and giving it charity, you can actually have them send it directly to charity and then it doesn't count as a part of your adjusted gross income. You don't get a tax deduction for it either. But with the new rules you may not get a deduction for your charitable gifts anyway. Doing the QCD is a way to actually create a tax benefit for some of these gifts.
QCDs can provide a lot of value for those who are trying to manage their charitable giving keeping their AGI low, you may still look at things like appreciated stock. Those can still be great ways to gift as well.
Benz: From your taxable account?
Steffen: Exactly. So, if you've got a highly appreciated stock or a mutual fund in your taxable account, you can give that right to charity and kind of accomplish the same benefit as the QCD, the qualified charitable distribution, plus you make the capital gain go away. But if you don't have those kinds of options for you, then the gift from the IRA could be a great way to do it.
Benz: Tim, always helpful advice. Thank you so much for being here.
Steffen: Good to be here.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.