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Charitable Giving and the New Tax Code: A Skeptic’s Perspective

With the new tax code in place, the standard deduction has increased across the board:

  • Individuals: $12,200
  • Heads of household: $18,350
  • Married couples filing jointly, or surviving spouses: $24,400

As a result, most people – whether they’re married or not – are planning to take the standard deduction next filing season. When you take the standard deduction, you don’t itemize your return – meaning that any deductible charitable giving wouldn’t be itemized.

As a result, people might be less inclined to give to charity as long as taking the standard deduction is their preferred filing strategy. However, many people may still decide to give anyways because it lines up with their values. If you fall into that camp, don’t worry! There are still options available to give in a tax-efficient way – it just might mean changing your charitable donation strategy.

Giving Is Still a Good Financial Move – But Your Strategy Needs to Shift

Just because it isn’t logical to itemize your standard deductions doesn’t mean you can’t still give in a tax-efficient way. Here are a few options to consider:

  • Donor-advised funds
  • Appreciated securities
  • Donating every other year and only itemizing on years you donate in bulk

Let’s go over what each of these donation strategies entails, and how you can decide whether or not they’re right for you.

Donor-Advised Funds

A donor-advised fund is an account used for charitable donations. It is established with a public charity and lets you (the donor) make charitable grants. Each time you contribute, you receive an automatic tax deduction and recommend grants to your favorite organizations over time. There are several benefits to donor-advised funds, including:

  • Contributions to the fund grow tax-free
  • Immediate tax deductions when you contribute
  • You can contribute appreciated assets to further reduce tax liability
  • You’re able to recommend that grants be taken out of the fund regularly

Appreciated Securities

You can gift appreciated securities directly to 501(c)(3) organizations to maximize tax savings. You never pay capital gains tax on the appreciated stocks, and can therefore both save money and give more of your hard-earned dollars to the charity of your choosing.

Bulk Donations

Another option is to donate to charity but to do it in bulk. Instead of donating monthly, or with each paycheck, like you traditionally might, you instead start donating to a savings account earmarked for charitable giving. Then, every other year, or every couple of years, you donate the funds that have accumulated to a charity of your choosing and choose to itemize your deductions in the year that you donate. During the tax filing years that you aren’t donating your savings, you’d take the traditional standard deduction.

Living in Illinois

If you’re in the Chicagoland area (like me!), you need to keep something else in mind – if you own a home and are paying the outlandish Illinois property taxes, you’re likely very close to hitting the standard deduction if you itemize. So, donating to charity may push you over into the territory where it makes more sense to itemize your deductions anyways.

What Strategy I’m Applying to My Financial Life

Personally, I’m choosing to focus on a charitable lumping strategy that works for my family. We alternate our charitable donations every-other-year, and only take the standard deduction on years that we don’t donate.

Then, on years where we donate in bulk, we donate two times the amount we typically would make itemizing our deduction more appealing. To stay on track with saving for the years that we donate to charity, we put aside funds in a regular savings account. Then, during the year that we contribute to charity, we tap into that savings account and donate our regular monthly allotted amount to charity, too.

Personally, I believe that charitable donating is a critical component to any budget. However, everyone needs to make a decision about whether or not they want to give on their own.

What’s Important To You?

When you’re trying to decide whether or not you want to give to charity, you need to decide whether or not you want to start contributing to charity. If you know you want to use part of your wealth to donate, but aren’t sure where to start, it can be wise to think through what you value. What causes support those values? What’s the best way to contribute to those charities, and use your wealth in a way that leaves you feeling fulfilled and supports the causes you care about?

Charitable donation is about so much more than just saving a dollar here and there on your tax return. It should be a way to help you align your money with what you value most. Have questions about how to donate to charity in a tax-efficient way? Let’s talk. The Deerfield team can help you put together a strategy that helps you give in a way that’s fulfilling and that saves you money in the long-run.