Clarity on Charitable Contributions

There is some confusion about the impact of the new tax law, enacted in December, 2017, on charitable contributions.

As we view our role as financial advisors to assist you in a broad, comprehensive manner, we want to provide you with clarity on this topic.

The tax law did not specifically change anything about charitable contributions, with a major caveat.

What the tax law did change was whether you will get a tax benefit for your charitable contributions, which depends on whether you will itemize or benefit from the new standard deduction amounts, which have increased significantly.

If you are married, the standard deduction for 2018 will be $24,000. If you are single, the standard deduction will be $12,000.

You need to compare whether your itemized deductions are greater than your standard deduction amount. Itemized deductions primarily consist of charitable contributions, mortgage interest, and the combination of state income taxes and real estate taxes, which are limited to $10,000 in total for both (a major reduction which will impact many taxpayers). There are other categories of itemized deductions, but these are the most common.

For example, let’s say you are married and your charitable contributions are $5,000, mortgage interest is $12,000, state income taxes are $5,000, and real estate taxes are $8,000.

You would have itemized deductions of $27,000 ($5,000 + $12,000 + $10,000, limit of state taxes and property taxes).

As your itemized deductions of $27,000 are greater than your standard deduction of $24,000, you would get the full benefit of all your charitable contributions.

If we change this example and the total itemized deductions would only be $20,000, then this couple would benefit from using the higher the standard deduction amount of $24,000. In this case, they may have made charitable contributions, but they did not get as much benefit as they could have, as explained below.

The key is to project whether you are going to be above or below the applicable standard deduction amount, whether you are single or married. You should project if you will be consistently above or below the standard deduction amount, and if it’s below, by how much.

If your deductions are going to be far above the standard deduction amount each year,then you should continue with your annual charitable contributions, as the tax law change really will not impact the deductibility of your charitable giving.

If you do not think you will exceed the standard deduction amount each year, then more planning is required. In this situation, we recommend that you bunch your contributions every other year, if that will help you exceed the standard deduction amount every other year. This would mean that for a couple, they may have $18,000 of deductions in 2018, and thus utilize the standard deduction amount of $24,000 in 2018. Then in 2019, if they pay more charitable contributions and have $28,000 of itemized deductions, they would get the greater tax benefit, as they would exceed the standard deduction amount.

If you have questions about this topic, you should consult with your tax advisor and review the figures.

For more advanced or significant charitable tax planning and giving concepts, please contact us. We have advised many clients on charitable giving and the interaction with their investments, estate planning and retirement accounts. This is a high value service we provide.

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