With the new tax laws, the hurdle to deduct charitable contributions became higher. The standard deduction for 2018 is $12,000 single and $24,000 married filing jointly. So, if your itemized deductions (medical expenses subject to floor, state/local tax, mortgage interest, charitable deductions) are under the standard deduction, there is no tax benefit to contribute to charities.
Although the hurdle has increased, there are opportunities for individuals to give to charity and receive a tax benefit. Let’s look at the different ways to give while being tax efficient.
CASH. The simplest way to give is cash. If you give to a public charity, you may deduct up to 60% of your adjusted gross income (AGI). This has increased under the new tax law, which previously limited cash contributions to public charities at 50% AGI. To maximize the deduction, contribute cash every few years so the itemized deduction exceeds the standard deduction.
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STOCK. With the rise in the stock market, many people have appreciated stock. You can donate stock and receive a charitable deduction equal to its fair market value. This makes donating stock much more appealing than selling the stock and donating the proceeds. As under prior law, the donation of stock is limited to 50% of AGI. Like cash, one strategy is to contribute stocks every few years in larger amounts to maximize the tax benefit.
COMMODITIES. A great option for farmers is to gift commodities. Instead of selling commodities to an elevator or cooperative, the farmer can deliver the grain in the name of the charity. The charity gets the proceeds, and the farmer does not report the sale of the grain. There are a few benefits to commodity gifting. First, if the farmer does not gift enough to exceed the standard deduction, he or she can still receive a tax benefit. Second, gifting commodities removes the farmer from income and, in turn, reduces self-employment tax. For farmers who give smaller amounts more frequently, commodity gifting may be the best method to donate to charities.
TRUSTS. Finally, charitable remainder trusts (CRTs) provide a tremendous ability to transfer a large amount of money to charities. I have previously written about CRTs and the economic benefits for donors, but, in most cases, the remainder that goes to charities is rather large. And, if the donor contributes assets to the CRT with basis, that basis can be used as a charitable deduction if the donor itemizes. A CRT is not only a good exiting strategy but a great way to give to charity.
Although tax benefits from charitable donations are an important aspect of giving, please remember that donating is very important. Charities rely on donations to provide services to those in need. Not all decisions should be solely tax-based.
Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in New Ulm and Minneapolis, Minnesota.
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