Welcome to Hidden Value, the column where Joe Elsasser, CFP, addresses common financial planning issues with insights advisors and their clients may not have considered.
The increased standard deduction under the sweeping tax overhaul passed in 2017 has created an interesting new challenge for taxpayers who give to charity.
Prior to the tax law, the standard deduction was significantly lower. The combination of a low standard deduction and personal exemptions, which have since been eliminated, created an opportunity for people to itemize their charitable contributions and their mortgage interest to allow them a greater deduction than the standard deduction.
However, with the increased standard deduction, far fewer people are expected to itemize. Most clients who give 5 to 10% of their income to charity per year won’t have enough deductions to itemize, or if they do itemize, the value will be reduced.
If you have a client who knows that they’re going to be contributing to a particular charity on a regular basis for an indefinite number of years, either a qualified charitable distribution or a donor-advised fund can be a much better choice.
Case Study: Donor-Advised Funds
There are a couple of significant benefits to considering a donor-advised fund. By adding appreciated stock or mutual funds to a donor-advised fund, your client may avoid capital gains tax. Additionally, your client could make a large one-time contribution and receive an immediate tax deduction. If the client distributed the contribution over several years instead, they may not meet the increased standard deduction. Let’s examine this further with a case study.
Your clients, Martin and Maria Martinez, are married and filing jointly. The have a total of $15,000 in deductions, including $10,000 in state and local taxes (because that deduction is now capped) and another $5,000 of mortgage interest. Their standard deduction is $24,400, which means that the first $9,400 of additional deductions will provide them no benefit as they would not be greater than the standard deduction.
Martin and Maria want to make a $10,000 annual charitable contribution to a local homeless shelter they care about for the next five years.