Tag Archives: charitable deductions

Checkbook labeled donate

Planning to give to charities: should you consider a donor-advised fund?

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It hasn’t been covered much, but charitable donation deductions were almost eliminated for the middle class in the tax “reforms”. You can only deduct your charitable contributions if you decide to itemize, and your allowable itemized deductions exceed $12,000 for a single and $24,000 for married filing jointly—and remember, all state and local taxes are capped at $10,000, no matter what your property tax is. If your mortgage interest is significant or your itemized deductions will exceed these caps, your charitable deductions will still be deductible. If not, nada.

There’s one exception. For the 2020 tax year, you can separately list up to $300/taxpayer as an “above the line” deduction, without itemizing. That’s not a fortune, but it’s something. But what if you give more, or plan to?

If your total allowable deductions exceed $12/24 K and you plan to itemize, then charitable donations will be deductible. Let’s say you pay $10,000 in property taxes, $14,000 for mortgage interest, and make a $10,000 charitable donation = $34,000 in itemized deductions.

But what if you’re married, with a paid off house, and your property tax is $10,000? Then you don’t get any deduction for the charitable donation, because you won’t itemize.  In this case, probably the simplest way to deduct charitable donations is to bunch them into years where your itemized deductions will exceed the standard deduction, even if that means you make the donation every other year. So, with $10,000 in property tax, and $20,000 ( 2 years’ worth of donations), you’ll have an itemized deduction of $30,000—but only $6,000 benefit over the standard $24,000 deduction. You’ll also have to park the yearly budgeted charitable amount in an account somewhere, and pay taxes on whatever the probably minimal earnings are.

Then there’s the donor-advised fund, available to set up at most of the big investment houses. When you establish this fund, you put in a large lump sum, for which you get a tax deduction in the year you contribute the money. Then, you can keep it invested (and hopefully growing) until you decide to distribute it. The investment house will gleefully set this up for you, AND charge you a yearly management fee of about .60% to park it in the investment(s) you select. For that, they’ll faun all over you and tell you what a good person you are. But this is another one of those instances where there’s money to be made off of you, so why not? Even better, they’ll work with your financial advisor, who will also charge you a fee. So just let me know, okay? (not!)

For the most part, it seems worthwhile to me to simply park your donations in your own investment account and avoid the .60% fee. You can always donate the appreciated investment and avoid capital gains taxes when you make the donation (if that’s a consideration). You’ll have to pay tax on any earnings (dividends, interest), but you can choose an investment with very low or no payouts of this kind. If this is a donation that you make pretty regularly, there probably won’t be that much in earnings anyway.

The one situation where I can see that a donor-advised fund makes sense is if you 1) receive a large, taxable payout in one year (as with a taxable executive compensation payout at retirement), 2) have charitable intent anyway, and 3) have sufficient taxable earnings in the same year that you can use the entire donation as a deduction. It’s not going to be a direct trade off—your deduction won’t reduce your taxes in the same amount, but you will get a break IF YOU INTENDED TO DONATE ANYWAY. Or maybe you think you’re a savvy enough investor that you can grow the money better and faster (over and above the management fee) than the charity’s endowment team can. Um.

Other than that, I think most charities would rather have the money now. Or every other year or three. In the meantime, you can always designate one of your investments or investment accounts as earmarked to be donated, keeping it invested until the year when you can itemize.

That’s the story as I see it. If anyone can point out other situations, I’d be happy to hear about them.

 

 

Tax stamp

Why your taxes went up

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Many of us are still pondering why we didn’t benefit from the alleged tax cut and worrying about what will happen this year, again. After all, tax brackets went down 3-4% for the first 4 tax brackets. But (and this continues this year) your taxable income most likely went up. Don’t expect that to improve for 2019. At a recent conference I attended, this was much discussed. Why?

You live in a blue state. Clever how that worked, huh? Because in many blue states and urban areas, your property taxes on a middle-class home probably exceeded the $10K cap. Add in your state income tax paid. And don’t forget that mortgage interest you used to itemize. With just these three, there’s a good chance you could exceed the $24K standard deduction (married filing jointly) or $12,000 (single). These increase to $24,400/$12,200 for 2019. Woohoo. But once income tax and property tax are capped at $10K total, your mortgage interest might not put you over the standard deduction.

Your charitable deductions don’t count. If you don’t itemize, you don’t get to take a charitable deduction.

You can’t deduct employee expenses. If you buy supplies, or uniforms (except for teachers), that’s on your dime, now.

You don’t have kids. People with kids saw the tax credit doubled.

For 2019, your medical deductions might not qualify. For 2017 and 2018, you needed medical expenses  greater than 7.5% of your income. For 2019, it goes back up to 10% of adjusted gross.

Changes to alimony. Alimony is no longer deductible to the person who pays, beginning with divorces finalized in 2019. The recipient will no longer be taxed on the alimony, but this is likely to result in lower payments to the recipient (since the payer will be dinged for more).

There’s not a whole lot to be done, except by voting. However, it’s important to remember that lower taxes are not the only consideration—what you get for them is also important. It’s how much spendable income actually ends up in your pocket. If you didn’t have to pay for healthcare, long term care, could look forward to a decent guaranteed income in retirement, and didn’t have to save or pay for  college or vocational training, but had to pay, say, 5% higher taxes, you’d most likely be better off.  It’s the value you get, not just the taxes you pay. I discussed this quite extensively in this post, and what exactly we get compared to other Western Democracies here.