It may be better to give than to receive, but for many taxpayers, receiving a tax break for their charitable giving is a good incentive. According to the Giving USA 2018 Annual Report, total charitable contributions in 2017 reached an all-time high of $410.02 billion, with 70% of those donations coming from individuals and the balance coming from foundations, estates, and corporations.
But will those philanthropic endeavors continue? Many charitable organizations are concerned about how the Tax Cuts and Jobs Act of 2017 (TCJA) will impact taxpayers’ willingness to keep giving. While tax reform did not make significant changes to the charitable giving deduction itself, it substantially increased the standard deduction. As a result, fewer taxpayers are expected to itemize deductions on their tax return, meaning fewer taxpayers have a tax incentive to donate to charities.
Overview of Tax Deductions for Charitable Contributions
As with most tax deductions, there are a lot of rules and limitations you need to be aware of. Here’s a rundown.
Taxpayers can deduct charitable contributions made to IRS-qualified charities. To be eligible, the organization must be classified as a tax-exempt organization.
Not all nonprofit organizations qualify. For example, civic organizations and some sports groups may be organized as nonprofits but not eligible for tax-deductible donations. Also, you cannot claim a deduction for donations to individuals, political organizations, or candidates. To be sure you’re giving to a qualified organization, use the IRS’s Tax Exempt Organization Search.
Your deduction for total charitable contributions can’t exceed 60% of your adjusted gross income (AGI) for the year. AGI is your total taxable income for the year, minus certain adjustments to income, such as contributions to a health savings account or IRA or the student loan interest deduction. On your 2018 Form 1040, your AGI is on Line 7.
However, a lower limit applies for donations to some charitable groups, such as veterans’ organizations, fraternal societies, and certain private foundations. For these organizations, the limit is 30% of AGI. The Tax Exempt Organization Search indicates whether a charity is a 60% or 30% organization.
As with other tax deductions and credits, you’ll need to keep records of your charitable donations in case you get audited. The kinds of records you should keep depend on whether your donation is made with cash (including checks or credit card donations) or non-cash (such as used clothing and household goods). Here are the records you need to keep for various donation types:
- Cash Donations Less Than $250: Bank record (such as a canceled check or credit card statement) showing the date of the donation, the name of the charity, and the amount of the donation.
- Cash Donations of $250 or More: Written acknowledgment from the charitable organization, such as a receipt or thank-you letter. You must receive this acknowledgment no later than the date you file your tax return for the year you made the contribution.
- Non-Cash Donations Less Than $250: Receipt from the organization showing its name and address, the date of the donation, and a description of the item donated.
- Non-Cash Donations of $250 to $500: Written acknowledgment from the organization showing its name and address, the date of the donation, and a description of the item donated. The acknowledgment must also indicate whether the organization gave you any goods or services in exchange for your donation, as well as an estimate of the value of those goods or services.
- Non-Cash Donations of $500 to $5,000: Written acknowledgment as detailed above, plus records showing how you got the property, the approximate date you got the property, and your cost basis.
- Non-Cash Donations Over $5,000: Written acknowledgment as detailed above, plus a written appraisal of the donated property from a qualified appraiser.
For more information on charitable contributions, check out IRS Publication 526.
Claiming a Deduction for Charitable Contributions
If you meet the requirements outlined above, there’s one more hurdle you need to clear to take advantage of the tax benefits of donating to charity: You must itemize deductions on Schedule A.
When you file your tax return, you have the option to itemize deductions or claim the standard deduction. The standard deduction is a fixed dollar amount, while itemizing involves adding up your actual expenses for things such as out-of-pocket medical and dental expenses, home mortgage interest, state and local taxes, and contributions to qualified charities.
If your total itemized deductions are greater than the available standard deduction for your filing status, you can itemize to get the larger tax benefit. If you’re filing your taxes through tax preparation software like TurboTax, they will help you understand if you can itemize your charitable donations or should claim the standard deduction.
How Tax Reform Impacts Charitable Contribution Deductions
The only change to charitable contributions made by the TCJA was an increase in the limit on how much you can deduct. Before the tax reform, taxpayers could deduct contributions up to 50% of their AGI. Tax reform increased that limit to 60%.
However, the TCJA also nearly doubled the standard deduction available to every filing status, as outlined in the following table:
|Married Filing Jointly||$12,700||$24,000||$24,400|
|Married Filing Separately||$6,350||$12,000||$12,200|
|Head of Household||$9,350||$18,000||$18,350|
As a result, fewer taxpayers will have enough itemized deductions to exceed the standard deduction.
To understand how this might impact you, consider an example. Adam and Priya are a married couple who filed a joint return for 2017. On Schedule A, they listed the following itemized deductions:
- State Income Taxes: $6,500
- Real Estate Taxes: $3,500
- Home Mortgage Interest: $6,450
- Gifts to Charity: $5,000
- Total Itemized Deductions: $21,450
Adam and Priya’s total itemized deductions were $21,450, whereas the available standard deduction for them for 2017 was $12,700. So they reduced their taxable income by an additional $8,750 by itemizing rather than claiming the standard deduction.
In 2018, Adam and Priya expect their available itemized deductions to be about the same as in 2017. However, with an available standard deduction of $24,000, it doesn’t make sense for them to itemize. They’ll reduce their taxable income by $2,550 by claiming the standard deduction rather than itemizing. Knowing they won’t get a tax break for charitable contributions, will Adam and Priya still donate $5,000 to charity? Maybe they’re passionate about the organizations they support and will continue to donate, but maybe not.
In 2018, Fidelity Charitable surveyed 3,000 American who took advantage of the deduction for charitable donations on their 2017 returns to find out if they planned to maintain their giving levels in 2018. Eighty-two percent of those surveyed said they planned to maintain or increase their giving levels in 2018, despite changes to the tax code
However, the survey results indicated that some of these taxpayers may not have fully understood how the increased standard deduction would affect them. Fidelity Charitable explains: “For example, 51 percent of households with incomes under $100,000 currently plan to itemize their 2018 taxes. It is likely that most donors at this income level will discover that their itemizations, including charitable donations, will not push the total deduction amount past the new standard deduction thresholds of $12,000 and $24,000.”
Simply put, taxpayers that continued making charitable contributions in 2018 may have been surprised when they filed their 2018 tax returns and discovered they weren’t receiving a deduction for those donations after all.
A Strategy for Deducting Charitable Contributions
Of course, plenty of people donate to charity every year without itemizing deductions and claiming a deduction for their giving. But if you’re on the fence, consider bunching your donations into one tax year. By doing so, you’ll give the same amount you would have over multiple years, but your donations for the year will be enough to qualify for the charitable contribution deduction.
Going back to our example, Adam and Priya typically donate $5,000 per year to their favorite charities. If they wanted to take advantage of the bunching strategy, they could donate $10,000 every other year. Assuming their other itemized deductions remained the same for 2018, their Schedule A would include the following:
- State Income Taxes: $6,500
- Real Estate Taxes: $3,500
- Home Mortgage Interest: $6,450
- Gifts to Charity: $10,000
- Total Itemized Deductions: $26,450
For 2018, they would reduce their taxable income by $2,450 by itemizing rather than claiming the $24,000 standard deduction. In this way, they could maximize their tax savings by itemizing in one year and taking the standard deduction the next.
If you’re planning on itemizing and claiming a deduction for your charitable contributions, do a rough tally of your itemized deductions. If the total doesn’t top the new standard deduction for your filing status, you may want to consider bunching donations for two or even three years into one year or looking at other strategies for reducing your tax bill without itemizing.
And remember, even if you can’t get a tax break for your giving, there are other reasons to donate to your charity of choice. It can make you feel happier and more fulfilled, improve the lives of others, and set an example of generosity for your friends and family. Those are the real reasons it’s better to give than to receive.
Do you donate to charity? How has tax reform impacted the amount you intend to give?