A law that went into effect last year could have a major impact on how many people make charitable contributions, or even if they make them at all.
The 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, to $12,000 for individuals and $24,000 for married couples. It also capped the state and local tax deduction at $10,000, reduced individual income tax rates, and curtailed mortgage interest deductions. As a result, instead of using itemizing deductions such as mortgage interest, property taxes, and charitable contributions, some people now fare better by simply taking the more generous standard deduction. This is especially true for middle-class baby boomers, who are less likely than younger people or the uber-wealthy to have large mortgages or to take mammoth deductions on their tax returns.
Because the law just went into effect for 2018 tax returns, it’s hard to determine whether it will deter people who no longer itemize from charitable giving. Last year, a report from the Tax Policy Center estimated that the number of households claiming an itemized deduction for charitable gifts to non-profits would shrink from about 37 million to around 16 million. As a result, notes the report, “the new law is likely to reduce charitable giving by somewhere in the neighborhood of 5 percent.”
Because of a number of factors, my husband and I are one of those households that made the move from itemizing to taking the standard deduction last year. While we haven’t curtailed charitable giving, we have become smarter about how we do it.
One tool we’re using is a donor-advised fund, a version of a charitable investment account. Cash donations are eligible for an income tax deduction of up to 60 percent of adjusted gross income. But the biggest advantage comes from contributions of long-term appreciated assets, such as stocks or mutual funds. Those gifts are not subject to taxes on capital gains, and the income tax deduction is the full fair market value of the securities (to a maximum of 30 percent of adjusted gross income). The ability to deduct full market value and not pay capital gains taxes can mean big tax savings over cash contributions for those with generous hearts, especially after a long bull market. And, earnings on donations accumulate tax-free in the account. Just don’t contribute amounts you may need for personal use at some point. Once the money goes into a donor-advised fund, it must be used only for charitable donations.
IRA account owners who are at least age 70 1/2 must take required minimum distributions. Instead of taking such distributions some people use what’s called a qualified charitable distribution (QCD), a direct transfer of funds from the IRA to a qualified charity. Unlike regular withdrawals, these distributions are excluded from income, and you don’t need to itemize to use them.
This technique involves postponing charitable contributions and other deductions so they can be lumped together to exceed the standard deduction and used in one tax year. This could work well, for example, if someone with a lot of stock market gains contributes to a donor-advised fund all at once instead of spreading donations out over several years. It can also be helpful for self-employed individuals, who often have more flexibility than employees to push taxes to another year. But because mortgages, state and local taxes, and other debt obligations have strict due dates the benefit of “lumping” deductions can be limited for many people.
As with many tax-related things state rules often differ from those of the federal government or other states. In my home state of Arizona, contributions to certain charitable organizations qualify for a state tax credit of up to $400 for individuals, and $800 for married couples. This means that for every dollar we contribute, a dollar comes off our state tax bill. Some states, like New York, allow deductions for charitable contributions on state tax returns even for those using the federal standard deduction.
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