The Tax Cuts and Jobs Act changed the way that taxpayers file their taxes. By raising standard deductions and setting limits on deductions for state and local taxes, the Act demotivates itemizing deductions. This means that most taxpayers will lose the tax benefits of charitable contributions. However, if you donate enough, it is possible that your charitable donations will save you more money than the standard tax deduction.
Confused about whether you should itemize, or take the standard deduction? Not sure of the best way to go about deducting your charitable contributions? Let’s discuss further.
What did the Tax Cuts and Jobs Act change?
Before 2018, taxpayers deducting charitable contributions could only deduct 50% of their Adjusted Gross Income (AGI). The Tax Cuts and Jobs Act expanded this limit to 60% for cash donations.
When donating non-cash items, the limits vary based upon the type of asset and the charity receiving the donation. Consult with a tax professional before making a donation to understand how the donation will affect your taxes.
How many fewer taxpayers will itemize after the Tax Cuts and Jobs Act?
The Joint Committee on Taxation estimates that 28 million fewer people will itemize in 2018 as a result of tax law changes. In 2017, over 46.5 million people itemized their deductions on tax returns. Experts estimate that only 18 million will do so in 2018.
View the Joint Committee on Taxation’s projection of taxpayer itemization in the coming years below:
|Itemized tax returns (thousands) by tax bracket|
|Less than $10,000||184||65||63||196|
|$10,000 to $20,000||547||154||100||360|
|$20,000 to $30,000||1009||237||185||622|
|$30,000 to $40,000||1671||410||250||904|
|$40,000 to $50,000||2356||635||408||1333|
|$50,000 to $75,000||6933||2136||1753||4890|
|$75,000 to $100,000||6752||2442||2224||5844|
|$100,000 to $200,000||17790||6513||7676||20821|
|$200,000 to $500,000||7745||4185||6410||16043|
|$500,000 to $1,000,000||1038||791||1329||2343|
|$1,000,000 and over||488||443||613||868|
|Total for all taxpayers||46,513||18,011||21,011||54,224|
*Income is equal to a taxpayer’s Adjusted Gross Income (AGI) + (1) tax-exempt interest, (2) employer contributions for health plans and life insurance, (3) employer share of FICA tax, (4) worker’s compensation, (5) nontaxable Social Security benefits, (6) insurance value of Medicare benefits, (7) alternative minimum tax preference items, (8) individual share of business taxes, and (9) excluded income of U.S. citizens living abroad. Categories are measured at 2018 levels.
9 tips for deducting charitable contributions
If you’re a big donor, itemizing your deductions may save you more than taking the standard deduction. But itemizing can be complex. Read these nine tips on deducting charitable contributions to streamline the process and maximize your savings.
And remember, if you have questions about your charitable contributions, speak with a qualified tax professional before filing your taxes.
1. Donate to qualified charitable organizations
When considering where to spend your donations, prioritize qualified charitable organizations. If the organization is not qualified, you cannot deduct your donation.
Before donating to any organization, I review them at CharityNavigator.org to confirm their legitimacy. The website rates each charity and provides links to their latest IRS Form 990 filings.
2. Confirm that itemizing is right for you
This tax season, standard deductions shot up, home equity loans are no longer deductible, and state and local income tax deductions max out at $10,000. As such, motivation to itemize has never been lower. Before you start filling out forms, confirm that your charitable donations and other deductible expenses net out to a larger sum than you’d receive as a standard deduction.
Once you’re certain that itemizing will save you the most money, you’re ready to start on the paperwork. To itemize your deductions, use Form 1040, Schedule A.
3. Accurately appraise your deductions
You can’t deduct everything that you donate to a charity. If you receive benefits in return for your donation, they will reduce the amount you can deduction. For example, if you receive tickets to a play or concert in exchange for your donation, you must subtract the fair market value of those tickets from your deduction.
4. Stock and non-cash property are at fair market value
Not all charitable contributions are made with cash. Many donors contribute stocks and other non-cash property instead. Whatever you choose to donate, you can deduct the fair market value of those goods.
If the stock you’ve donated appreciates in value, you can reduce your taxes in two ways. First, you can avoid paying capital gains on the price appreciation. And, second, you can deduct the fair market value of the stock as of the date you donated the stock.
Stocks aren’t the only way to donate non-cash property. My family donates used clothing, toys, and furniture each year. We use the website ItsDeductible.com to determine the value of the items we donate.
5. Request a written record of your donation
When making any charitable contribution, always request a written record of your donation. For donations of $250 or more, the IRS requires written documentation in case of an audit.
Create a file folder to hold your donation records throughout the year. The documentation should include the name of the organization, the date, and the amount contributed. Suitable documents include a written statement from the organization, a bank statement, or a payroll stub documenting the donation.
6. Get items worth more than $5,000 appraised independently
When donating items worth $5,000 or more, the IRS requires an independent appraisal. This also applies to groups of similar items that collectively exceed the $5,000 threshold. Additionally, you’ll have to fill out Section B of Form 8283 when filing your tax returns.
7. Bunch deductions
“Bunching” means grouping deductions into one tax year to maximize their value. For example, you could save your money through 2018 and then double your donations in 2019. In this case, you might take the standard deduction in 2018, and then itemize in 2019. This can help you to maximize your deductions.
8. Create a donor-advised fund
Donor-advised funds are tools for savvy taxpayers to make charitable contributions without having to immediately designate a recipient. This strategy complements donation bunching, and can help reduce taxes during a high-income year. Consult an investment advisor for the best strategies in creating a donor-advised fund.
9. Donate from retirement accounts
Taxpayers over 70 1/2 years old can donate up to $100,000 directly from their IRA. This is called a qualified charitable distribution (QCD). Retirees making these donations receive two benefits. First, IRA withdrawals do not count towards their adjusted gross income and are therefore not taxed. And second, QCDs count towards the required minimum distributions that a retiree must withdraw each year.
These donations must come from an IRA and not a 401(k). If a QCD interests you, open a brokerage account and perform a 401(k) rollover before making this type of charitable contribution.
Make your charitable contributions count
Although it feels good to help others in need, you don’t want to miss out on the tax benefits you could receive. Review your charitable giving strategy with a tax professional to ensure you aren’t missing out on any deductions. By saving more on your taxes, you can free up even more money for future donations.
Need help prepping your taxes to maximize your deduction? These tax preparation firms can help.