There are many good reasons to give gifts and make charitable donations. Supporting a cause you care about tops the list. Research studies suggest that a habit of charitable giving may make you happier; any tax benefits are merely icing on the cake. Nonetheless, a December 31 deadline for tax purposes has trained many of us to focus on charitable donations at this time of year.
Given our ingrained habit of year-end giving, you may wonder how the 2017 Tax Cuts and Jobs Act impacts charitable giving. The good news is that charitable deductions can still be taken on your income tax return, depending on how much you give, in what form, and whether your itemized deductions exceed the new, higher standard deductions.
How the 2018 Tax Law Has Changed the Rules
First, here is a summary of some of the changes in the tax law that the President signed in December 2017 to take effect on January 1, 2018:
- You can now give to charity up to 60 percent of your adjusted gross income (AGI). The previous limit was 50 percent. Donations of property other than cash, including long-term appreciated stock, are limited to 30 percent of your AGI (you can avoid a capital gains tax by gifting appreciated property to charity).
- The itemized deduction for state and local taxes is capped at $10,000. Most itemizers deduct state taxes and mortgage interest in addition to charitable contributions.
- The standard deduction for single filers increases from $6,350 to $12,000; for married filers (filing jointly) the standard deduction is increased from $12,700 to $24,000; for heads of household filers, the standard deduction went from $9,350 to $12,000.
- To college sports fans: no charitable deduction is allowed for payments made to an institution of higher education if, in exchange for the contribution, the donor receives a right to buy tickets or a seat to a sports event.
Look at all of the charitable contributions you made in 2018. Do they add up to more than your new standard deduction? For example, if you are a single filer and gave $11,000 to charity this year, then you must take the standard deduction of $12,000 instead. However, you can double up on your contributions in 2018, giving $22,000 this year instead of giving $11,000 in 2018 and $11,000 again in 2019. By giving two years’ worth of contributions in 2018, you exceed the standard deduction, and you can itemize your charitable contributions as deductions.
Please remember that the amount of contributions is subject to the 60/30 percent limits of your AGI mentioned above. Any excess over the applicable limit can be carried forward to future years, but if the amount carried forward falls below the standard deduction, you will be obligated to take the standard deduction.
Other Ways to Give to Charity with Tax Advantages
Donor Advised Funds
If you want to make a gift to charity, but are undecided on which charity will receive your contributions, consider using a donor advised fund. A donor advised fund allows you to “bundle” years’ worth of charitable contributions, yet receive an immediate income tax deduction for the contributions. Certain nonprofits, like community foundations, called “sponsoring organizations,” manage these types of funds; the contributions, whether cash or non-cash, are invested in vehicles with income-tax-free growth. You, as the donor, can make recommendations to the fund regarding which qualifying charities receive contributions.
The law regarding qualified charitable distributions has not changed. If you are 70.5 years old or older, you can still transfer up to $100,000 from your IRA directly to a qualifying charity each year. This transfer will not be income taxable to you, yet the amount that is directly transferred to charity is counted toward satisfying your required minimum distribution.
Charitable giving is a complex area of tax law. Special rules apply depending on whether the contributions are made to a public charity, a private foundation, or a donor advised fund. Special rules also apply depending on the type of property that is contributed, such as cash or non-cash gifts. Please contact me at email@example.com or (508) 756-2423 if you have questions.