Nearly everyone knows about the famous 1970s television series ”The Brady Bunch:” two parents, six children, a housekeeper, and a dog all under one roof. In fact the house shown as the exterior on the show just sold for 3.5 million dollars.
Now, in 2018, another bunch is looking to sweep across America and grab ahold of the American taxpayer: the bunching of charitable donations, deductions, and contributions on one tax return for maximum effectiveness.
Most business owners who utilize a pass-through type business structure see their business and personal charitable contributions on Schedule A of their personal 1040 tax returns. Individuals and married couples are able to itemize if those amounts are more than the standard deduction. In 2018, the threshold for itemizing deductions versus taking the standard deduction is $24,000 for couples filing jointly or $12,000 for taxpayers filing as single. This is quite the change from the $12,700 for couples and $6,350 for individual taxpayers in 2017. So what exactly does this mean for you?
Focusing on married filing jointly taxpayers, that threshold can be difficult to hurdle even with the average Austin property taxes of $7,600 and a median Austin home price of $326,250, yielding a mortgage interest deduction of approximately $11,000 in the first few years. Adding the standard sales tax deduction of $2,400 to the total only gets us to $21,000 (or just barely below the standard deduction threshold), and that’s more of a best case scenario versus the norm. Most married couples in Austin have lower mortgage interest deductions (or none at all). In addition, some Austin homeowners pay more than $7,600 in real estate taxes, but the total deduction for all taxes (sales, real estate, and state) is capped at $10,000 in 2018 and beyond.
Using the example above, the taxpayers would essentially “lose” the first $3,000 in charitable contributions, because adding $3,000 to our total would only get the taxpayer to the standard deduction amount with no additional tax savings. Your motivation for making charitable contributions may not be driven by a tax deduction, but for those who like to feel good and save on taxes, you may want to look at bunching your donations to maximize both.
What are your options?
Let’s assume you like to contribute $5,000 a year to charity, with 2018 being no different. As our example above proved, you would only get a tax deduction for $2,000 of the $5,000 contributed. But, if you were to contribute $1,000 in 2018, save the remaining $4,000 in a bank account, and then contribute $9,000 in 2019, you would end up contributing the same amount and receive a more beneficial tax break.
Another option is to consider a donor advised fund (DAF). You contribute assets (money, property) to the DAF, and you receive an immediate tax deduction. The DAF then distributes the money to charities in the form of grants each year. There is no timeline the DAF needs to follow to distribute the money in the form of grants. A DAF is a good idea if you have appreciated property that you want to contribute, as those assets would transfer to the DAF tax free.
For those taxpayers who don’t mind paying more in administrative costs, a foundation may be a gifting option for you. A foundation works similar to a DAF except you have more direction over where the money goes. It allows for a salary and/or life insurance policies to the board members, which can be a long term planning option, and they are perpetual in nature.
For some taxpayers, 2018 is a time to change their thinking to maximize their charitable contributions, with options ranging from the simple to the complex. If the new tax law will not change your thinking on donating money because you get the warm feeling of a sunshine day no matter the tax savings, then, by all means, keep on that path. But, if you’re a taxpayer who wants to minimize taxes and still make charitable contributions, then you should discuss options for bunching those contributions with your trusted tax advisor.