How Recent Tax Changes Affect Charitable Giving

Big changes often have unintended consequences – and the Tax Cuts and Jobs Act of 2017 was one of the biggest changes in the history of American tax law. These changes may have an effect on nearly every person who makes a charitable donation. However, it could be children in need who stand to lose the most.

What Is the Standard Deduction and How Does It Affect Donor Incentives?

In order to understand the impact this new law has on charitable giving, it’s important to understand the relationship between the standard deduction and itemized deductions such as charitable contributions.

The term “standard deduction” refers to the amount each taxpayer is allowed to subtract from their adjusted gross income to arrive at their taxable income. Previously, single taxpayers were able to deduct $6,350 and married taxpayers filing a joint return could deduct $12,700. As of 2017, that standard deduction has been raised to $12,000 for single taxpayers and $24,000 for married taxpayers filing a joint return. Prior to the new tax law, nearly one quarter of Americans itemized their tax deductions. Millions of generous individuals used were able to increase their itemized deductions by charitable giving.

However, as the standard deduction has been nearly doubled under the new tax law, this picture may soon change. In years to come, the White House Council of Economic Advisers predicts that fewer than one in ten taxpayers will continue to itemize deductions.

Tax benefits are rarely the primary reason to help a person in need. Nevertheless, people give more when there is an incentive. Predictions by organizations like the nonpartisan Tax Policy Center forecast that the new tax law could reduce charitable giving by up to $20 billion annually.

What Does the New Tax Law Mean for Charitable Donations?

The tax incentives for charitable giving haven’t gone away. Charitable donations to eligible 501(c)(3) non-profit organization, such as Hockey vs Cancer continue to be itemized deductions which may reduce your taxable income.

You should keep a bank record or receipt of the transaction. Previously, this requirement was waived for smaller donations granted to tax-filing charities, but that’s no longer the case. Managing that requirement may be easier if you donate by check or credit card.

2018 Charitable Deductions Limits

How much of a donation is tax deductible? The limit on the deductibility of cash charitable contributions to an eligible 501(c)(3) organization as an itemized deduction on your 2018 tax return is 60% of adjusted gross income. If you surpass the charitable deduction limit for one year, you can carry-over that deduction for a maximum of five years. These increased limits, raised over the previous limit of 50%, is actually good news for charities.

How to Maximize Your Tax Deduction Through Charitable Giving

The new standard deduction is $12,000 for a single-filer, $18,000 for a head of household, and $24,000 for married couples filing a joint return. Raising your itemized deductions to be larger than the standard deduction is often a matter of planning.

Charitable deductions often work best combined with other deductions, such as tax payments and medical expenses. Grouping charitable contributions with these other types of itemized deductions is sometimes called “bunching.” It’s a strategy that can maximize the tax benefits of your generosity, and have a huge impact on the lives of children in need.

A popular way of doing this is by timing your charitable contributions to take the standard deduction one year, and then itemize deductions the next. Suppose you pay an annual tithe to your church. You might double donate in December, offering your support for the current year and the next year, simultaneously.

Another way to maximize your charitable deductions is by establishing your own donor-advised fund. It’s essentially a savings account for charity. You might contribute to the account over the course of a year, and then immediately resume your previous donation schedule. Donations are immediately deductible, and you can distribute from the account at your own pace.

We suggest you consult your tax advisor on ways to maximize the tax benefit of your charitable contributions.