Everyone has probably already heard complaints about the new tax law’s effect on charitable deductions. Experts agree that higher standard deduction in 2018 will result in millions of taxpayers who will no longer find it advantageous to itemize deductions (charitable or other types) on their federal tax returns. For those who will still itemize, lower tax rates mean deductions carry less value. In 2018, the standard deduction will almost double to $12,000 for single filers and $24,000 for joint filers. Because some popular deductions were reduced or capped (think state and local taxes as well as home mortgage interest), many folks will find their total allowable itemized deductions will come in lower than the standard deduction. What does that mean for those who will no longer realize any tax benefit from itemizing charitable deductions? And what changes affect those who still should itemize their charitable donations in 2018?
What do you want first? The good news or the not-so-good news?
It’s short so here is the good news first: charitable donations remain deductible under the Tax Cuts and Jobs Act. The rules are largely the same with only a few changes.
- Charitable cash donation limit increased. The percentage limit for charitable cash donations by an individual taxpayer to public charities and certain other organizations increases from 50% to 60% of their adjusted gross income (AGI). See Line 37 on IRS Form 1040.
That about does it for the good news. Now the not-so-good news:
- Deductions for Certain Payments to College Athletics. Taxpayers can no longer deduct payments made to a college or college athletic department (or similar) in exchange for athletic event tickets or seating rights at a college stadium.
- Charitable Standard Mileage Rate Frozen. The charitable standard mileage rate will no longer be adjusted for inflation. So for 2018, the rate remains a lousy 14 cents per mile. As in previous years, if a taxpayer itemizes, they can still deduct the costs of gas and oil directly related to getting to and from the place where they volunteer. As an alternative to making those calculations and keeping those records, they have the option to instead deduct 14 cents for each mile traveled using a personal vehicle. That rate, however, compares unfavorably to the IRS standard mileage rate of 54.5 cents per business mile and 18 cents for medical and moving deductions. These rates each increased one cent over 2017 rates as a result of inflation.
Why a little tax planning is now more important than ever
If you have benefited from itemizing charitable contributions in previous years and are worried about how the changes might impact you in 2018, don’t panic just yet. There is a bit more good news. Doing a bit of advanced planning with a tax professional will still allow you to realize significant tax savings from your charitable giving. This is because the Tax Cut and Jobs Act did not change some of the biggest (but lesser known) tax advantages for charitable donations. These include:
- Donations of appreciated stocks or bonds. By donating appreciated stocks or bonds, rather than cash, one still avoids capital gains taxes regardless of whether or not a donor itemizes. If a donor doesn’t want to change their current investments, they just utilize the cash they planned to donate to buy the same bonds or stocks to replace those donated. The new or replacement assets would then have 100 percent basis, which in the simplest terms means no capital gains taxes are due on any past increase in the value of donated assets. This creates a “win-win” for both the donor and charity as it eliminates any taxes that might be due while increasing the amount available for charity by as much as 20 percent.
- Using donor-advised funds. Donor-advised funds were also unaffected by the Tax Cuts and Jobs Act. Per Wikipedia, a donor-advised fund is “a charitable giving vehicle administered by a public charity created to manage charitable donations on behalf of organizations, families, or individuals.” These funds allow givers to deposit dollars into them in one year, but then spread out gifts to charities they designate over a period of several years. This is an effective strategy for individuals who may wish to itemize deductions the first year (the year they contribute to the fund), but may instead want to take the standard deduction in the second or future years.
- Qualified charitable distributions. Donors that are 70 ½ years of age or older can continue to donate to a charity directly from an IRA. Known as a “qualified charitable distribution”, this method of giving is better than a deduction because the income is never reported to the IRS and the gift counts towards the required minimum distribution the donor must withdraw each year. The tax savings is not contingent on whether or not the donor is itemizing deductions on their federal return; it remains the same either way.
Have questions about the 2018 changes? Need to talk to a tax professional about your charitable giving plans or developing your tax strategy? Please feel free to contact us today to schedule your appointment.