One of the unintended consequences of the increased standard deduction was that many people who received a tax deduction for charitable giving in the past may not get that deduction going forward.
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Previously we discussed the TAX CUTS AND JOBS ACT OF 2017 and how it increased the standard deduction beginning in 2018. One of the unintended consequences of that was that many people received a tax deduction for charitable giving in the past, and now some of those same people may not get that charitable deduction so that may change how much they give.
WHY WOULD IT CHANGE HOW MUCH PEOPLE GIVE?
It really shouldn’t, but if we think about us humans in general, people always thought about charitable giving as a win – win. Therefore, they were able to give to charitable organizations and receive a tax benefit at the same time. With the change in the tax law and the increase in the standard deduction, one of those two benefits may be reduced or eliminated – the tax deduction part, so now they might be giving it just because they want to.
WHAT IS THE DEFINITION OF A CHARITABLE DONATION?
A charitable donation is a gift made by an individual to a nonprofit organization, public charity or private foundation. The IRS has a listing of all of the charitable organizations that they recognize on their website.
Most people give donations in cash, but you could also give property such as stocks, cars, household items, clothing, etc.
Each type of donation has its own set of substantiation rules and valuation methods. You have to figure out what the fair market value is of each particular donation. Cash and marketable securities are pretty easy, but when you come to things like cars, household items and clothes, it is pretty hard to determine what the fair market value is.
WHO DETERMINES THE FAIR MARKET VALUE OF A CHARITABLE DONATION?
The fair market value is determined at the taxpayer level. There are a lot of resources on the internet that will give you ranges of about what things are worth. It is up to you as an individual to determine whether it is a good item or a bad item, or is it somewhere in the middle? And then you base your own judgment on how much you are going to take as a deduction.
Gifts directly to individuals and many gifts made outside of the United States are not charitable donations for tax purposes.
WITH THE CHANGE IN THE STANDARD DEDUCTION AMOUNTS, ARE THERE WAYS THAT PEOPLE CAN STILL BENEFIT FROM MAKING CHARITABLE DONATIONS?
Absolutely. We talked in past episodes about bunching of itemized deductions. This is where you make both cash and noncash donations in a particular calendar year. You make as many of those donations as possible, or you prepay some donations that you planned on making in the next year. This would allow you to maybe itemize in one year and then take the standard deduction the following year.
There are also other things that you can do:
- Age 70 ½ – Distribution from IRA directly to the charity – $100k max
- Not from ongoing SEP or SIMPLE IRA
- Can satisfy the Required Minimum Distribution for a year
- Reported as distributions on Form 1099 – must notify your tax preparer
- Trustee to trustee transfer
- Some investment companies provide checkbook
In summary, if you are over 70-1/2, you could do what’s called a Qualified Charitable Distribution. You can give up to about $100,000 each year directly from your IRA to a charity. Once again, you have to be over 70-1/2 and it has to be from an IRA. So if you are still working and you have an SEP Plan or a Simple Plan, that generally doesn’t work. It has to be from your IRA. As most people over 70-1/2 know, you also have what is called the Required Minimum Distribution that you have to take out each year. This amount that you give directly to charity can count towards the required minimum distribution for that year. This will be reported as distributions on your Form 1099, but what will happen is that you don’t claim that income on your return. You also don’t get to claim the tax deduction. Therefore, it allows you to reduce your income without having to use that deduction as an itemized deduction.
WHAT ABOUT A DONOR ADVISED FUND?
Sure. I believe these will become more popular now with the new tax law. A Donor Advised Fund is basically a charitable giving vehicle that is administered by a public charity. A donor can give a lump sum to this entity on an annual basis, but the entire amount doesn’t necessarily need to be spent all in the current year. Therefore, the person gets a tax deduction today for say $25,000-$30,000, and they can take that and donate it to different organizations over the next 2-3 years. You can also set up things such as family foundations. If you are really looking to accelerate your donations, depending on the method, you may be limited to deducting 20%, 30%, or 60% of your total income as a charitable donation. If you go over that amount, those excesses can be carried over for up to five years.
With the changes in the tax law, it will be more difficult to get the benefit from charitable contributions, but by doing a little bit of planning with your accountant and investment advisor, you can still provide to the charity and get a tax deduction at the same time.