The Tax Cuts and Jobs Act of 2017 greatly simplified tax preparation for most people. The new law does this by 1) increasing the standard deduction and 2) eliminating many itemized deductions. While charitable donations were not eliminated, the combination of these two changes means many taxpayers will take the higher standard deduction rather than deducting their charitable donations.

How is the standard deduction changing?

For a married couple filing jointly, the standard deduction increases from $12,700 in 2017 to $24,000 for 2018. Thus, the amount of deductions needed to itemize is much higher. More taxpayers will just take the standard deduction.

What itemized deductions are being eliminated?

The biggest change taxpayers may notice is the $10,000 cap on state and local taxes. A couple in Illinois with $300,000 of income may pay $12,000 of state income tax and another $12,000 for property tax. However, the new law limits this deduction to $10,000 which much less than the $24,000 amount previously deducted.

Other lesser used deductions like moving, medical, casualty and theft, and miscellaneous (tax prep, investment advice, unreimbursed work) are eliminated or reduced as well.

What does this mean for charitable donations?

Let’s continue with the example from above to demonstrate the deduction impact to charitable donations. Click for example

You can clearly see the benefit of itemizing deductions is greatly reduced. In this example, the incremental deduction of the charitable donation in 2017 is the full $5,000. In 2018, the incremental deduction for charity is reduced to $2,500.

Most people I know do not make charitable donations for the tax benefit. They donate out of the goodness of their heart and to support organizations that do great work in helping others. But wouldn’t it be nice to capture more tax benefits for giving?

How to potentially save your charitable deduction with a donor-advised fund.

Is it possible to maximize the itemized deductions in one year and take the standard deduction in others? It sure is and here’s how…

1. Open and fund a donor-advised fund (Schwab, Fidelity, and Vanguard all have them) with four years of charitable donations. Let’s call it $20,000 ($5,000 x 4 years) to stay with the example.

2. Take the $20,000 deduction in 2018 for the donor-advised fund contribution, plus the $5,000 already donated for the year. Contributions to a donor-advised fund are deductible when they made, not when the money is distributed (granted) to the charitable organization.

3. Over the next four years, make grants to your favorite qualified charitable organizations. Enjoy taking a higher standard deduction and don’t worry about tracking down receipts for itemized charitable deductions.

Let’s see how the total deductions play out with this strategy over the five-year period. Click for example

And compared to making annual charitable donations? Click for example

By using a donor-advised fund to bunch charitable donations into a single year, this hypothetical couple increased their deduction by $15,000 ($142,500 - $127,500) over five years and reduced their taxes by $3,600, assuming a 24% tax rate. These tax savings could be used to make even more charitable contributions or added to your overall financial plan.

Every person’s tax situation is different, but this is one example of how proactive tax planning can help with your financial decisions.