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Charitable Donations

Tax reform changed the rules around making charitable contributions. And with the new standard deduction in place, many may be considering the pros and cons of making tax-deductible donations this year.

For many taxpayers, giving cash or other resources to charity serves a twofold purpose: In addition to directly supporting causes they care about, these donations are tax-deductible. However, tax reform has a direct effect on the tax deduction side of charitable contributions.

 

Before the passage of the Tax Cuts and Jobs Act (TCJA) – also known as tax reform – in late 2017, charitable donations were more likely to be part of your tax deductions. However, tax reform nearly doubled the standard deduction for most taxpayers – here’s how:

 

Filing Status

2018

2017

Single

$12,000

$6,350

Married Filing Jointly

$24,000

$12,700

Married Filing Separately

$12,000

$6,350

Married Filing Separately*

$0

$0

Head of Household

$18,000

$9,350

Qualifying Widow(er)

$24,000

$12,700

 

These new standard deduction values might make the idea of itemizing deductions less attractive for many taxpayers, especially those in the middle class who may have given a bit more to charity in previous years. The Tax Policy Center predicts this change in the standard deduction will effectively halve the amount of taxpayers who itemize deductions, dropping the number to around 16 million people, many of whom are high-income earners.

 

Tax reform limited the amount of deductible taxes, (including real estate, income or sales, and other property taxes) to a total of $10,000. Many of the states that have high state and local income taxes, and/or real estate taxes, are trying to provide an alternative to their residences by creating a charitable account for their residents to pay their real estate taxes through. The IRS has released rulings that real estate taxes are still subject to the limits even if put into these charitable holding accounts. Taxpayers in these states will still be subject to the $10,000 total tax limit on their real estate taxes and not eligible for a charitable contribution deduction on the amount of taxes put into this charitable account.

 

Tax reform increased the amount of “cash” donations a taxpayer can claim each year. The new ceiling is 60 percent of adjusted gross income; it had been 50 percent. This means a taxpayer with a $100,000 adjusted gross income (AGI) can donate up to $60,000 and claim the full amount on their tax return.

 

Taxpayers who are age 70 ½ or more can make a direct charitable contribution of up to $100,000 from their IRA to a favorite charity and consider the amount as all or part of their minimum required IRA distribution for the year. This makes the distribution nontaxable, saves the taxpayer many tax dollars, and preserves the full standard deduction if they do not otherwise itemize deductions normally. Taxpayers who are eligible should talk to their financial advisor.

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