There seems to be some mis-understandings about the tax deductibility of charitable contributions due to the Federal tax changes that were enacted in late 2017, which are now effective for 2018 and going forward. Let’s try to clarify this matter.
There were no changes in the new tax law that specifically affected charitable contributions.
What changed is whether you can itemize or not.
We know that the financial world is continually changing. We know that the tax laws changed, and we hope this information provides you with clear and useful information. We want to help you overcome complexity and enable you to make better financial decisions.
If you can itemize, which means that your various deductions total more than the increased standard deduction amount, then you would continue to get a direct tax benefit from your charitable contributions.
The Tax Cut and Jobs Act (TCJA) vastly increased the standard deduction amounts. The 2018 and 2019 standard deductions amounts are as follows, respectively:
- Filing Single….$12,000 and $12,200
- Married Filing Joint couples….$24,000 and $24,400
- Head of Households….$18,000 and $18,350
What is deductible to determine if you can itemize has changed, but how or what charitable contributions can be deductible has not changed.
- State and local taxes, such as property taxes and state income taxes are now limited to $10,000 per year (previously, there was no limit).
- In general, mortgage interest is still deductible.
- Most miscellaneous itemized deductions have been eliminated.
If the total of your deductions exceeds the standard deduction amount for the filing category that is applicable to you, then you would benefit from itemizing. And if you have charitable contributions as some of your deductions, then you would get a tax benefit from those contributions.
If the total of your deductions is below the standard deduction amount that is applicable to you, then you would not be getting an incremental tax benefit from your charitable contributions.
If you are married, your standard deduction amount is $24,000 for 2018. If a couple paid $10,000 of state and local taxes and had mortgage interest expense of $10,000, any charitable contributions above $4,000 would enable this couple to itemize. If they made $10,000 in charitable contributions, which includes cash and property contributions, like used clothes donated, they would benefit as their total deductions would be $30,000.
If the same deductions were made by a single person, the $30,000 of deductions would far exceed the standard deduction amount of $12,000, and clearly this person would itemize and benefit from their charitable contributions.
This is really a case specific issue. Each person or couple will need to review the impact of the new tax law to their own specific situation and determine the impact on their deductions.
What we want to clarify is that many people will continue to be able to itemize and will continue to get real tax benefits from their charitable giving.
If your deductions are going to be far above the standard deduction amount each year, then you should continue with your annual charitable giving, as the tax law change really will not impact the deductibility of your charitable contributions.
If you do not think you will exceed the standard deduction amount each year, but could be close, then more planning may be beneficial. In this situation, we recommend that you consider bunching your contributions every other year, if that will help you exceed the standard deduction amount every other year.
For example, let’s say a couple will have $15,000 of deductions in 2019, not including their charitable contributions of around $8,000 per year. If they make the charitable contributions each year, they would have $23,000 of deductions, and thus utilize the standard deduction amount of $24,400 in 2019.
However, if they bunch the contributions into an every other year cycle, they would get a significant benefit. If they gave most of the prior annual contributions of $8,000 into one year of $16,000 of contributions and then skip making most of the contributions in the following year, they would get a significant tax savings.
In the above example, they would have $15,000 of deductions in 2019, not including charitable contributions….and would still get the $24,400 standard deduction amount. In the next year, they would have deductions of $31,000 (the $15,000 + $16,000 of bunched charitable contributions), which would far exceed the 2020 standard deduction amount. You probably cannot or would not want to skip some contributions in a year, but you could let the charity know your plans, if they are counting on your annual gift.
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.
Obviously, charitable giving is a very personal matter.
We hope that you give to charities which are important to you and will continue to support their worthy causes and efforts, regardless of whether you get a tax benefit under the new tax law.
We welcome you to share this blog post with others, so they will have accurate information about charitable giving.