Four Things You Should Know about How the New Tax Reform Affects Charitable Giving

What is Deductible?

Like in years past, you must take the itemized deduction to receive any credit for donations of cash or goods to your favorite charities. Eligible donations that are deductible, include money and gifts given to:

  • churches or religious organizations;
  • federal, state, or local governments, if they are used for a public purpose; or
  • 501(3)(c) nonprofit organizations.

However, you must deduct from your donation any benefit you received from the donations. For example, if you donate $100 to a local nonprofit university but receive a $75 pair of seasonal tickets to their football games, then only $25 ($100 donation - $75 tickets) would be deductible. Cash or goods donated to individuals or political campaigns and/or candidates are not deductible. For donated goods rather than cash, typically, you can deduct the fair market value (FMV) or the price you would get if you sold the property. Finally, if you donate cash or goods worth $250 or more, you should obtain and save a statement from the charity. However, maintaining all receipts and/or statements for your charitable donations will make it easier to tally your allowable deduction at the end of the year for your accountant. Although the statement and/or receipts do not need to be submitted with the return, you should keep it with a copy of your return in the event of an audit. Without property documentation, in the case of an audit, the IRS may disallow the deduction.

How the Increased Standard Deduction Will Affect Charitable Giving

Because the standard deduction, starting with tax year 2018, increased to $12,000 for single filers and $24,000 for married couples filing jointly, whether the changes to charitable giving affect you will greatly depend on if you have enough itemized deductions to exceed the standard deduction. Due to the standard deduction almost doubling, it is expected that only 10% of taxpayers will take the itemize deduction in tax year 2018. To take a deduction for donations made to charities, you must itemize your deductions, instead of taking the standard deduction.

Increased Limit for Charitable Donations

If you do itemize, cash charitable donations are deductible up to 60% of your adjusted gross income (AGI), increased from 50%. The limit for gifts of stock remains unchanged at 30% of your adjusted gross income. This means that if your AGI is $100,000, you could donate up to $60,000 to your favorite charities or gift up to $30,000 in stocks. Of course, you can donate / gift more, you just will not receive any tax benefit from doing so.

Increase Tax Deduction for Charitable Giving by Stacking or Grouping Donations

Whether or not the new changes will negatively affect charitable giving has not yet been determined. The Tax Policy Center is forecasting 50% fewer taxpayers will claim a deduction for charitable donations starting in 2018. Will people continue donating to their favorite charities, if they are not receiving any tax benefit? There are ways you can continue giving to your favorite charities and maximize your tax savings by stacking or grouping donations.

If you do not have enough deductions to itemize this year, you may set aside a special savings account for your charitable donations and make a larger donation every other or even wait for three or five years. This requires great discipline on your part, but the tax savings can be substantial. For example, if you are a married filing jointly filer and you and your spouse make $20,000 in charitable donations annually, if you have no other deductions, you would not qualify to deduct the charitable donations. If you qualify to take the standard deduction, which most taxpayers do, the standard deduction would still be your best option, as you would receive a $4,000 greater deduction ($24,000 standard deduction for married filing jointly filers starting in tax year 2018 - $20,000 charitable donations).

Given the same example, if you save the amount you would donate and give it in alternating years, the tax savings would be significant. For example, in 2018, you would donate $0, but in 2019, you would donate $40,000. This would allow you to qualify for a $40,000 tax deduction for tax year 2019, as long as it does not equal more than 60% of your adjusted gross income. This would give you a $16,000 greater tax deduction than taking the standard deduction, based on your charitable giving alone ($40,000 - $24,000 standard deduction). For a couple in the 24% tax bracket, this would equal a savings of about $3,840.

Even if your charitable donations already put you above the standard deduction threshold and you take the itemized deduction, it can still be very advantageous to take your charitable donations in alternating years to increase your deduction. If the charitable organizations are depending on your donations, especially smaller, local nonprofits, make sure to let them know your larger donation will be covering a longer period, so they can plan accordingly.

The Bottom Line

Depending on your individual situation, it may make sense to contribute to a donor-advised fund or consider stacking your entire Schedule A. To stack your entire Schedule A, you would consider making your charitable donations in years when for example you have high medical bills or in alternating years, if you can prepay your property taxes. Although prepaying property taxes to get a larger itemized deduction only makes sense under the new tax reform, if with the extra payment, your state and local taxes (SALT) still fall below $10,000 for the year. To develop a charitable giving plan based on your individual situation, schedule an appointment today with the tax professionals at Gudorf Tax Group.