With recent law changes, the federal standard deduction now exceeds $12,000 for individuals and $24,000 for married couples filing jointly and grows each year with inflation adjustments. With only mortgage interest, state and local taxes, catastrophic medical expenses, and charitable contribution deductions to accumulate, many families and individuals face a seemingly insurmountable wall to exceed the "free" standard deduction and, instead, itemize their own write offs.
Some have even questioned whether charitable contributions are deductible anymore; however, all is not lost!
MinistryCPA offers four strategies for you to consider as the 2019 calendar year comes to a close.
1. Many state income tax returns do not follow the federal itemized deduction rules. This allows taxpayers to continue gaining a tax benefit for charitable contributions. For example, a Wisconsin taxpayer with $50,000 of Wisconsin income is granted a standard deduction of $6,709 (married filing joint is $14,641). While Wisconsin does not permit a deduction for state and local taxes, for most taxpayers this is a much shorter wall.
2. Taxpayers may consider incorporating an every other year contribution cycle. By bunching contributions heavily in one year and doing the same with deductible state tax payments, taxpayers can significantly beat the standard deduction limit every other year, and on the off year take the generous standard deduction.
2. Taxpayers may consider incorporating an every other year contribution cycle. By bunching contributions heavily in one year and doing the same with deductible state tax payments, taxpayers can significantly beat the standard deduction limit every other year, and on the off year take the generous standard deduction.
3. Taxpayers with ample cash flow consider funding a donor advised fund (DAF). This option allows donors to make a large, one-time contribution to the custodian of an investment fund that supervises the disbursement of the funds based on advisement from the donor. In the calendar year of the initial contribution to the DAF, the donor takes the deduction. Subsequently, he/she advises the custodian to make charitable contributions out of the fund. For example, a one-time $50,000 DAF contribution could support annual disbursements of $10,000 for five years. Fidelity Charitable, Charles Schwab, and T. Rowe Price are three of many firms that offer donor advised funds. One caution: some donor advised fund firms will only disburse contributions to charities registered with the Internal Revenue Service. Because churches are exempt from formal registration, a DAF firm may not be willing to process distributions to churches that have not applied for and received a Tax Determination Letter.
4. Taxpayers who have reached age 70½ are eligible to make qualified charitable distributions (QCD) from their retirement funds (e.g. IRAs, company retirement plans). Once taxpayers reach this age, they are required to take annual minimum distributions from their retirement plans (RMDs). Herein lies a problem: the RMD is reportable income that many retirees may choose to turn around and contribute to their favorite charity, but then cannot scale the wall of the generous standard deduction. QCDs allow senior citizens to have their investment companies send contributions directly to their charities. In this case, while no charitable contribution deduction is allowed, neither is the distribution reportable as income. Taxpayers who use QCDs may contribute up to $100,000 annually.
IRS Publication 526 provides additional information regarding DAFs and QCDs.
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