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Monday, November 19, 2018

How Does the New Law Affect My Giving to Charity?

Many people choose to make their charitable contributions at the end of the calendar year between Thanksgiving and December 31. Our friends at the National Association of Enrolled Agents contributed this guest post to help you understand how recent changes to the tax code may affect your charitable giving.

The Tax Cuts and Jobs Act (TCJA) ushered in sweeping changes to the tax code that, among other things, increased the amount of money that you can give to charity and take a deduction. Individuals may now deduct charitable contributions of up to 60% of adjusted gross income as compared to 50% last year. So why are analysts forecasting a sharp drop in charitable giving this year?

One of the signature changes of the TCJA is that the standard deduction has increased to $12,000 or $24,000 for taxpayers depending on whether they are single or married filing jointly. Since the standard deduction claimed by individuals or couples has nearly doubled, fewer people will itemize their deductions, and you must itemize in order to deduct charitable contributions from your taxes. The Tax Policy Center estimates 21 million fewer Americans will take the charitable deduction under TCJA as compared to last year. However, people still like to give money to their religious organization or favorite charities, with or without the ability to take a tax deduction. 

Let’s examine a few ways that may allow you to give and still get a tax break under the new laws. If you are over 70 ½ years, the answer is very simple – you have your IRA make the contribution to the charity. The exact mechanics are that the money taken out and given to the charity does not count as income but does count against the Required Minimum Distribution that plan participants must withdraw from their retirement account each year. For those who are well-heeled with large IRA accounts, you can donate $100,000 per year this way.

Another technique that people will use, especially those who are on the borderline between taking the standard deduction and itemizing, would be to bunch a few years of contributions into one year. You can do this either by simply donating more to the charity this year and nothing for the next several, or you can establish a Donor Advised Fund and make one large deposit into this year, take the deduction, and then have the fund make the distributions over time.

This option can be appealing to those who are falling a few thousand dollars short of itemizing. Assume that you usually give $3,000 per year and your total itemized deductions are $21,000. Over three years you would use $72,000 in standard deductions. If you can bunch the $9,000 into one year, then your total deductions for the three years would be $75,000, an additional $3,000 in deductions.

The recordkeeping requirements have not changed. The recipient must be a qualified 501c (3) organization and you can check their standing on Charity Navigator or at the IRS website. A receipt is required and for any donation of $250 or more, a timely written acknowledgment stating that no goods or services were exchanged.
For more tax tips on charitable giving, read this press release issued by the National Association of Enrolled Agents, an organization that represents the interests of licensed tax professionals like myself. Finally, remember that the tax advice that you read online is general until you apply it to your own situation!

Morris Armstrong is an enrolled agent based in Cheshire, Connecticut.

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