How Does the New Tax Law Affect Charitable Giving?
As Christians, we are called to be generous. God has been so generous with us that he expects us to respond in kind. King David so aptly stated, “Everything comes from you, and we have given only what comes from your hand.” (1 Chronicles 29:14)
While we reflect God’s generosity, we should do so wisely. There are certain opportunities available to save on taxes through charitable giving, which can enable us to give even more.
You may have heard that the new tax reform law eliminates the tax benefits of charitable giving. That’s not really true. There are changes, but there are also still ways to benefit from giving on this side of heaven, you just have to know your options.
The Bad News: The New Standard Deduction Discourages Giving
We’ll start with the bad news: the new standard deduction is almost twice as high as it was in 2017.
Wait a minute, that doesn’t sound like bad news, does it? It’s really only bad news for those that like to get a deduction for their charitable giving.
You see, to get a tax break for your giving you have to itemize your deductions. With a higher standard deduction, most people will be better off taking the standard deduction instead of itemizing their deductions. And no itemizing means no deduction for charitable giving.
The 2018 standard deduction for a single filer is $12,000, up from $6,350 in 2017. The numbers are twice that for married filers. That means that you have to have over $12,000 ($24,000 for a married couple) worth of property and state taxes, interest payments, and charitable giving for it to be worthwhile for you to itemize your deductions.
As such, fewer people will be itemizing their deductions. This has people worried that charitable giving will decrease since one of the incentives has nearly disappeared.
The Good News: Increased Limits On Charitable Deductions
The new tax law isn’t all bad for charitable giving, though. While lower-income earners may have fewer incentives to give, high-income earners actually have more. Under the old law, deductions for cash charitable contributions were limited to 50% of adjusted gross income (AGI). Now, the limit has increased to 60% of AGI, meaning you can benefit even more from giving.
Another limit on giving by high-income taxpayers was eliminated with the new law, called the Pease limitation. It was a rule that phased out as much as 80% of itemized deductions, including charitable giving, for high-income earners. Without that limitation, taxpayers are not limited in their charitable deductions and as a result, can have even higher itemized deductions.
A New Giving Strategy: Bunching
But, what if you don’t make enough to out-give the standard deduction? Are you just out of luck?
Not at all. You just have to be more strategic. Instead of giving on a weekly or monthly basis, you can give on an annual basis to get the tax deductions.
Let’s say you’re a single taxpayer who tithes $5,500 a year, gives another $1,000 to other organizations, and has $5,000 worth of deductible taxes and interest payments. The way you normally give, your itemized deductions would add up to $11,500. That’s less than the standard deduction, so you would likely take it instead of itemizing.
What if, instead of giving throughout the year, you bunched it up and did two years’ worth of giving in one year? Every other year you would give twice as much and the next year you would give nothing. Your total giving would be the same, only your timing would be different.
How would that bunching strategy affect your taxes? In the year you gave double, you would be able to itemize for a deduction of $18,000 ($5,500*2+$1,000*2+$5,000=$18,000). In the year that you didn’t give, you would take the standard deduction of $12,000.
Overall, you would end up being able to deduct $6,000 more every other year, significantly lowering your tax bill.
If you are going to do this, it would be nice for you to let the organization you’re giving to know about your strategy. Then, they can plan their finances accordingly and aren’t expecting such large gifts every year.
Taking It To The Next Level: Donor Advised Funds
If you want to take bunching to the next level, you could open a donor-advised fund (DAF). A DAF works basically like a charitable savings account. You put money into the account with the intent of donating it, then you can make your donations whenever and however you want.
The key is that you get to claim the charitable deduction when you fund the account, not when you disburse the money. That way, you could put several years’ worth of funds in at once and reap all of the tax benefits in that year. Then, you get to distribute it to your charities over the ensuing years just as you would have otherwise. Except that you got a big tax break the year you funded it.
Senior Special: Qualified Charitable Distributions
If you’ve reached age 70 ½, you may have another option not available to us young ‘uns. As long as you have a Traditional IRA, you don’t have to worry about bunching and itemizing. Instead, you can get an immediate tax benefit by making qualified charitable distributions (QCD).
A QCD is a charitable donation made directly from your Traditional IRA. If it goes straight from your IRA account to the charitable organization and never touches your hands, then it does not count as taxable income to you. That way, you get the same tax advantages from your charitable contributions without having to itemize deductions.
On top of simplified tax benefits, a QCD counts towards your Required Minimum Distributions (RMDs). And, it lowers your taxable income, which can help you qualify for other credits and deductions and helps with the taxability of Social Security and the cost of Medicare. QCDs do have special rules and restrictions, though, so you should consult a financial advisor before attempting one.
Even with a higher standard deduction, there are still opportunities to get a tax benefit for your charitable giving. If you have questions about these strategies or want to discuss how to apply them to your personal situation, let me know. I’m here to help.
And always remember, we don’t give for the tax deductions. They are just the icing on the cake. We give as imitators of Christ, who gave it all for us.