Charitable contributions and tax deductions have always been a classic pair, right up there with milk and cookies or peanut butter and jelly. However, with the passing of the Tax Cuts and Jobs Act, this classic pair may not go together as well as it used to without some thoughtful tax planning. The increase of the standard deduction to $24,000 (MFJ) and the $10,000 cap for state income and property taxes means that the number of people itemizing their deductions will decrease significantly. Even high-income taxpayers may have to be creative to optimize their charitable deductions.
Consider a married couple that doesn’t have a mortgage and donates $15,000 per year to charity. With a maxed out state tax deduction, their itemized deductions would be $25,000, only $1,000 over the standard deduction. This is not much of a tax benefit compared to years past. Many charities are worried that donors may give less because of this. However, if before the current tax year ends the couple donates the money they have allotted for their 2019 charitable giving they could increase their itemized deductions to $40,000. In 2019 the couple wouldn’t make any charitable contributions and they would utilize the standard deduction. This strategy would net them $64,000 in deductions over two years compared to $50,000 if they kept the status quo. Additionally, if donations are being made in January and December of a giving year there should be minimal change in cash flow for the taxpayers and the charitable organizations, a win-win for everyone involved.
Regrettably, not everyone has the means to be as generous as our fictitious couple in the example and won’t be able to itemize their deductions. Fortunately, there are still other strategies to optimize charitable contributions for certain taxpayers. For example, if you are over 70½ years old and have an IRA you can make a Qualified Charitable Distribution (QCD) from your IRA income to a qualifying charity. Unlike a normal charitable contribution that must be included in your itemized deductions, the QCD directly reduces your taxable IRA income.
Charitable organizations depend on your donations to support their missions. Take the time to reach out to your tax accountant and make sure you are utilizing the strategies that will create the largest tax benefit possible from your generosity.