Charitable Giving Strategy
The first time Congress allowed a tax deduction for charitable giving was in 1917, only a few months after the U.S. entered WWI. This deduction was created as a way to bolster charities and their war efforts, and it has been available to taxpayers ever since. Today, taxpayers can take a charitable contribution deduction of up to 50% of their Adjusted Gross Income. However, the future of charitable giving may be changing. The recently passed tax reform, known as the Tax Cuts and Jobs Act of 2017, will reduce the amount of tax savings individuals will receive from their charitable donations, which may impact how, or how much, they choose to give.
How will the changes impact charitable giving?
The charitable contribution tax deduction is only available to taxpayers who itemize their deductions, and with the passage of the Tax Cuts and Jobs Act (TCJA), fewer people will be itemizing than in years past. They will, instead, be better off taking the standard deduction. The TCJA increased the standard deduction for all taxpayers; the standard deduction for single filers increased from $6,350 to $12,000, and for married filers, it increased from $12,700 to $24,000. As more taxpayers take the standard deduction, fewer people will experience a tax savings from their charitable donations.
A Possible Solution – “Bunching”
For taxpayers whose itemized deductions are close to the standard deduction threshold, a technique called “bunching” may be a way for them to receive a tax benefit from their charitable donations. Taxpayers who utilize this technique will take the standard deduction one year, and itemize the next. For this technique to be effective, taxpayers must double up, or “bunch,” their deductible expenses into the same tax year. Charitable gifts are easy to bunch – taxpayers can simply hold onto the amount they would have donated in one year, and pay double the next year when they plan to itemize. Bunching will not be beneficial to all taxpayers, and it will involve meticulous planning to successfully execute, but it is a tax savings option for some.
Things to Remember
If taxpayers are able to itemize their deductions, there are a few things they must remember when they contribute to a charity.
They must donate to a qualified charity.
The IRS has a description of what charities qualify for the deduction. Typically, 501(c)(3) organizations will qualify. If taxpayers are unsure, they can use the IRS’s Exempt Organizations Self Check online search tool to find the qualification status of the charity in question.
They must know how much of their donation is deductible.
If taxpayers receive something in return for their donation, they are only able to deduct the amount of the donation that exceeds the fair value of what they received. If, for example, a taxpayer donated $500 for a seat at a charity dinner, they would have to reduce their deduction by the fair value of the food and entertainment they enjoyed that evening. This calculation can be difficult to ascertain, so taxpayers may need to talk to the charity directly for guidance.
Donating in-kind items may require different reporting.
Certain types of donations, including donation of cars, stocks, or noncash property that exceeds $5,000 in value, can require additional reporting and potentially even appraisal.
Receipts are important.
A taxpayer who donates money or goods exceeding $250 in value must have written proof of their donation from the charity. These receipts must include the donation amount and type, and what the taxpayer received (if anything) in recompense.
Plan for 2018 and Beyond
The increase in the standard deduction is a simple change, but it has potential to affect many taxpayers. To determine whether or not you should alter your plans for charitable giving, contact a professional. Here at Spire, we can project what your future tax position will be, and you can feel confident that your charitable contributions are providing you with the most tax benefits possible.