The Tax Cuts and Jobs Act of 2017 changed a lot about living in California. While the Standard Deduction doubled, personal exemptions were eliminated, and several prominent deductions were capped or eliminated, including:
- Deductions for state and local taxes (income, property, sales and other) are capped at $10,000.
- The cap on new mortgage interest was lowered to $750,000; interest is only deductible on the first $750,000 of mortgage debt.
- Interest on Home Equity Lines of Credit is no longer deductible.
- Miscellaneous deductions (subject to the 2% of Adjusted Gross Income (AGI) limit) are eliminated. This includes tax preparation expenses, investment expenses, unreimbursed business expenses (like home office deductions) and investment advisory fees.
- Personal casualty losses (e.g.: your house burns down) are no longer deductible unless you are part of a declared national disaster.
This means that most taxpayers in California will simply use the Standard Deduction ($12,000 single, $24,000 married) and perhaps the Additional Deduction for those over 65 ($1,300 each).
So let’s assume you use the standard deduction. Your other itemized deductions (mortgage interest, state taxes and charitable contributions) would have to exceed $24,000 for a couple (or $26,600 if you’re a senior married couple) in order to take an itemized deduction for the contribution. Don’t get me wrong; the charities you support will still be very appreciative of your donation, you just may not get the same tax benefit you’ve received in the past.
But there are a couple of ways to keep your 2018 charitable deductions.
1) Qualified Charitable Deduction (QCD).
To use this strategy, you need to be over 70½ and taking required minimum distributions from your retirement accounts. Distributions from an IRA or 401(k) are almost always taxed as ordinary income to you. However, a QCD is a distribution directly to a charity from your IRA (not 401k or 403b). Because you never receive it, it’s not considered income to you. Effectively, you get the deduction on page 1 of your tax return (by lowering your income) rather than on schedule A as an itemized deduction.
There are some restrictions, and you need to keep excellent records, but most financial institutions are able to help with this process. Because it does involve some legwork, it probably only makes sense to do this for lump sum gifts (rather than monthly installments).
2) Donor Advised Fund (DAF).
This requires a bit more work, but is available to any taxpayer who can make a significant contribution to charity. Let’s say your annual donations are $2,000 per year, which might not be deductible in any single year (because your total deductions would be less than the $24,000 standard deduction). But suppose you could fund the DAF with $10,000 or $20,000 in a single year. That entire amount would then be eligible for a tax deduction in the year it’s made, so that your interest payments, tax payments and other charitable contributions might all become deductible again in that year. You could use appreciated stock for the added benefit of avoiding the capital gains tax (since the DAF wouldn’t pay tax on the sale of the stock).
A Donor Advised Fund functions a bit like your own mini foundation. You could fund the DAF in a single year, then use the DAF to make your normal charitable contributions. Donor Advised Fund minimums run from around $5,000 to as much as $25,000, and can be set up online (Vanguard, Schwab, Fidelity, etc.) or locally through the San Diego Foundation. They require annual management, and you can invest your donations within the DAF. But the donation process is pretty easy and most will help you research your charities if you have questions about them.
At the end of the day, gifts to charity are not really about the tax deduction; they’re about supporting your community and the causes you care about. The tax deduction is merely a sweetener that makes such generosity a little easier. But these two strategies can help you continue to support your community while also retaining some of the tax benefit.
At B&F, we listen and understand what’s important to you, and we provide proactive planning and guidance, so you can navigate important decisions with confidence. If you would like help ensuring that you (and the charities you support) are getting the most out of your contributions, call us. We can help.