After the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) it’s estimated that 90 percent of taxpayers will chose the standard deduction instead of itemizing deductions. With the cap on the state and local tax deduction and the doubling of the standard deduction its harder than ever to claim itemize deductions in 2018 and forward.
With that being said, if 90 percent of taxpayers chose the standard deduction then 90 percent of taxpayers didn’t receive any benefit from charitable deductions whatsoever.
However, for those in the 10 percent of taxpayers that do itemize deductions charitable giving is more important than ever. Specifically, the timing and the type of charitable contributions will significantly impact your current and future tax liability.
Benefits of Non Cash Contributions
There are two major benefits of choosing to give non cash contributions over cash contributions:
- Tax deduction – potential deduction equal to fair market value
- Exclusion of capital gain – permanent exclusion of capital gain
To fully understand this concept let’s look at two examples of charitable giving and how they impact an individual’s tax liability.
In our first example let’s assume Bob wants to give a contribution of $50,000 to a charitable organization of his choice. Bob decides to sell some stock he’s held for over a year for its fair market value of $50,000. Bob gives the organization $50,000 in cash, however, Bob has a tax liability on that $50,000 capital gain.
In our second example let’s assume Bob gives a charitable contribution of $50,000 worth of stock held for over one year. In this example Bob will be able to claim a $50,000 charitable contribution without the corresponding tax liability of $50,000 worth of capital gains.
As shown by the above two examples it can be beneficial to be strategic in your gift giving to maximize your tax savings.
Only Contributions to Qualified Charities are Deductible
Before giving any contribution to a charitable organization you want to make sure the organization is a qualified organization defined by the IRS’ guidelines.
The easiest way to check if the organization is a qualified organization is by using the IRS’ online database. It’s now easier than ever to see if your contribution will be eligible for a full deduction.
Limitations on Non Cash Contributions
Although giving noncash contributions can be tax beneficial there are still further considerations before making a cash or noncash contributions. Specifically, the general limitations are more beneficial for cash contributions.
For tax years 2018 and forward the limitation for cash contributions has been raised from 50 percent of AGI to 60 percent of AGI. For contributions of noncash contributions the limit remains at 30 percent of AGI.
Congress enacted these limitations to expressly limit the benefit from using appreciated property to limit a taxpayer’s tax liability. Since this is the case, taxpayers will have to ensure they are maximizing their contributions by keeping this 30 percent limitation in mind.
Adjustments For Short Term Gains/Ordinary Income
Another consideration taxpayers will have to keep in mind is the tax consequence of selling the asset vs. gifting the asset to a charitable organization. For example, a taxpayer will have to adjust their charitable deduction by any amount that would have been taxed as a short term capital gain or ordinary income.
For example, if a taxpayer were to give appreciated property that was held for less than a year then the taxpayer would deduct their basis in the property instead of its fair market value.
Likewise, if a taxpayer were to donate property subject to depreciation addbacks that would be taxed as ordinary income then they would have to adjust the charitable deduction accordingly.
5 Year Carryover Rules
If your noncash contribution exceeds the 30 percent limitation then you will be able to deduct the excess in future years. However, you can only carryforward excess contributions for five years.
This can be difficult especially when considering the carryovers follow a LIFO hierarchy. For example, if a taxpayer’s AGI was $100,000 and they had carryovers of $10,000 from five years ago and $30,000 in the current year then they would have to apply the $30,000 first before applying the carryover of $10,000
In the above scenario the taxpayer would lose out on $10,000 of charitable deductions all because of the timing of the gifts. This is why it’s important to use the limitation rules in conjunction with the carryover rules to maximize tax deductions.
Appraisals and Valuations
For donations of appreciated property taxpayer’s will need to get an appraisal for the fair market value of the donated property. Generally, you do not need to attach the appraisals to your return but you should keep them for your records.
You do not need a written appraisal if the property is:
- Nonpublicly traded stock of $10,000 or less
- A vehicle (including a car, boat or airplane) if your deduction for the vehicle is limited to the gross proceeds from its sale,
- Intellectual property
- Certain securities considered to have market quotations readily available
Generally, you’ll need a written appraisal attached to the tax return if the donation is art valued at $20,000 or more, clothing and household items not in good used condition, easements on buildings in historic districts, and deductions more than $500,000 for which none of the above exceptions apply.
Partnering With Trusted Professionals
Maximizing charitable contributions for tax purposes can be difficult especially in a post TCJA world. For this reason it’s important to partner with trusted professionals to get the biggest bang out of your charitable giving.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.