Over the past few years, many high net worth taxpayers have witnessed the unfortunate removal of a substantial amount of itemized deductions from their Schedule A worksheets. Examples include a $10,000 limitation for state and local taxes, no deduction for miscellaneous items such as investment and other professional fees, and a cap on home mortgage interest deductions.
Furthermore, the standard deduction has doubled in the past three years. Under current law, for 2020, the standard deduction that can be subtracted from your taxable income without itemizing is $12,400 for individuals and $24,800 for married couples. This increase may leave individuals with nominal or no mortgage on their primary or secondary residences in a position of not actually itemizing.
Due to the above factors, many charitably-inclined individual taxpayers may be receiving little to no annual tax benefit from their charitable contributions. However, there are two very simple and inexpensive means to increase the tax benefits from annual charitable giving:
First, for those individuals who regularly contribute to the same charities year after year, it may be advantageous to “bunch” a few years’ worth of contributions into a single tax year. This technique of bunching deductions into one taxable year, as opposed to a three to five year period of time, may help individuals exceed the annual standard deduction threshold amount, and therefore receive a larger tax benefit for their charitable donations.
If the individual donor does not want to provide three years’ worth of deductions to their favorite charities all at once, an alternative option could be the use of a Donor Advised Fund (DAF).
Using Donor Advised Funds
Cash contributions to a DAF are generally deductible in the year of contribution (subject to certain caps), and the funds can then be distributed to your favorite charity in subsequent years. An upfront tax deduction is created when the cash is donated, which then reduces your current year tax obligation to Uncle Sam. And in 99% of the cases, your favorite charity can continue to receive their annual future donations via grants made from the DAF.
To really get the largest bang for your buck, it is even more tax advantageous to donate long term and low-cost basis securities. By using this technique, the individual donor will receive a tax deduction equal to the fair market value of the low-cost basis securities and not have to otherwise recognize capital gain income. In addition, when the DAF sells the securities, no income tax is owed to the IRS since the DAF is tax exempt due to its public charity status.
If you are interested in how the bunching of charitable donations or the use of a Donor Advised Fund might reduce your tax liability, contact your Clark Nuber tax advisor before year end to discuss your personal charitable giving strategy and objectives.
Leslie Hurt is a senior manager in Clark Nuber’s Tax Services Group.
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