Effect of the Tax Cuts & Job Acts on Charitable Donations

The new Tax Cuts and Job Act significantly impacts the standard versus itemized deductions for individuals. Many taxpayers do not need to itemize due to a few changes that went into effect, namely:

State Tax, Local Tax, and Property Tax deductions are maxed out at $10,000

Most miscellaneous deductions such as out of pocket employee expenses, fees to financial advisors and tax preparers, etc., have been eliminated

The new standard deduction is now $12,000 for single taxpayers and $24,000 for married filing joint, which is set to increase over time.

This means, if you are like most people and you don’t have a large mortgage or business interest payments, then you probably do not have enough deductions to itemize. You can simply take the standard deduction. That means, you no longer need to gather all those charitable donation receipts or to make year-end charitable giving plans to increase your itemized deductions.

So, what tax options do we have in charitable donations that can benefit a taxpayer? I can think of three.

Donation of Appreciated Assets: Assets such as stocks, bonds, collectible arts, real estate, etc., tend to appreciate in value over time. The current rule remains that when an individual donates such an item, he/she can deduct the full fair market value of the item on the date of donation and does not need to report the gain on the asset. For example, say that you have XYZ company stock that you bought 10 years ago for $200 per share and it is now valued at $1,000 per share. If you decide to give one of these stocks to a charitable organization, you get to deduct the full $1,000 as a charitable donation and do not have to report a gain of $800 per share. This can be quite strategic for some individuals.

Required Minimum Distributions (RMD): If you are over 70½, you are required to take the Minimum Distributions from retirement plans such as 401(K), 403(B), IRA, etc. If you find yourself not having enough deductions to itemize but wish to decrease your taxable income, you can give instructions that your RMD be distributed directly to the charitable organization(s) of your choosing. As long as you did not receive your RMD first into your own account, IRS deems this as having satisfied the required minimum distribution rule, and you do not need to report this. This reduces your taxable income even if you take the standard deduction.

Bi-Annual Bunching of Charitable Giving: If you want to continue to support an organization but you ordinarily would not have enough to take the itemized deduction, then you might consider giving every other year to your favorite charities. Suppose you are married filing joint and you maximized the $10,000 tax deduction, had $8,000 of total mortgage and other deductible interest, and did not have enough medical expenses to deduct. Then your charitable donation has to exceed $6,000 in order to take the itemized deduction. If you ordinarily give only $5,000 to all of your organizations, then you might give double that amount ($10,000) in one year and skip the following year and give again the year after that.

The Charitable Donations provision, however, is not just a tax strategy. Many charitable organizations find themselves without adequate grant sources, and the new tax law changed some of their ordinary giving pipelines. Thus, for many organizations, your charitable gestures now have a much greater impact than ever before.

As with all tax and financial planning issues, be sure to consult your tax professional for situation-specific advice.