The Tax Cuts and Jobs Act is expected to reduce the number of households who claim charitable contributions as itemized deductions from 37 million to roughly 16 million in 2018, according to The Tax Policy Center. This reduction comes primarily from households earning less than $200,000 per year. This article will detail exactly how the new law impacts those who give money to charity and how households can continue to benefit from this deduction.
Doubled Standard Deduction
One main feature of the new law that will reduce the number of households benefiting from the charitable contribution deduction is the expanded standard deduction. For 2017 the standard deduction was $6,350 for single tax filers, and $12,700 for married filling joint taxpayers. For 2018, these numbers almost double to $12,000 for single filers and $24,000 for those married filing joint.
With the enhanced standard deduction, taxpayers will now need more than $24,000 in cumulative itemized deductions to get an added tax benefit. Since most taxpayers don’t have more than $24,000 in itemized deductions, they will be limited to the standard deduction.
Limitation and Elimination of Itemized Deductions
Not only will it be more difficult to claim charitable deductions because of the increased standard deduction, it will be more difficult to reach the $24,000 deduction threshold because certain itemized deductions are limited, or eliminated all together.
The most notable cap on itemized deductions is the limitation for state and local taxes to $10,000. This is a major deduction for taxpayers in states with high income taxes and high real estate taxes. With only an allowable deduction of $10,000 in state and local taxes, households will need more than $14,000 annually in charitable deductions and mortgage interest.
How to Maintain The Charitable Deduction
For households with income between $100,000 and $200,000 who are on the cusp of the $24,000 mark it might be beneficial to double up on charitable contributions every other year. This will allow for the higher itemized deductions every other year which will decrease the cost of after tax charitable gifts.
Another strategy would be to donate appreciated stock. You not only eliminate capital gains but you also get the deduction at the higher appreciated value. You would be better off donating the stock than selling the stock and donating the proceeds. When you sell an appreciated stock and donate the proceeds to a charitable organization you may or may not benefit from the charitable deduction. However, donating appreciated long-term capital stock directly eliminates taxable income and therefore is a more viable option.
The doubling of the standard deduction and the elimination of key itemized deductions will make it more difficult to itemize in 2018. This reduction in the number of taxpayers who benefit from the charitable deduction may or may not hurt charitable organizations who depend on small dollar donors. However, with proper planning and an effective tax strategy, taxpayers may still get a tax benefit while donating to a good cause. To see how you may be impacted personally, consult with a tax advisor.
This article is for educational purposes only and should not be relied upon as legal, tax, financial or other paid professional services.