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Charitable Contributions

Woman holding a box of donations including a teddy bear

With the change in the season and the return of fall, many people begin the act of making their homes less cluttered, and we will all begin to get donation requests in the mail.  As the weather cools, we tend to turn an eye towards end of year tax moves as well.  The Tax Cuts and Jobs Act of 2017 brought about many changes in how businesses and individuals are going to operate starting for 2018 onward.  With the deviations to the itemized deductions that we are all so used to, rethinking your charitable giving is a must.

Charitable contributions are gifts given to qualified non-profits by either individuals or businesses.  This can include money, physical items, and/or investments.  In order to be qualified, a non-profit must have a religious, educational, literary, charitable or scientific purpose and have 501(c)(3) status from the IRS.  The IRS provides a tool that helps you determine if the charity is a qualified charity.  Fair market value is used to determine the amount of the gift.  Often it is assumed that a gift of time and labor can also be deducted.  This is not in fact true.  This is because the value of your time versus someone else’s is arbitrary and the Internal Revenue Service does not deal in vague terms.  What you can deduct from your volunteered time and labor are the costs that directly relate to those endeavors, including auto costs or mileage, other transportation and supplies.  You must have a receipt for all of your claimed deductions.  Additionally, you can only deduct the amount of the donation that exceeds the fair market value of the benefit received if you get something in exchange for the donation.  For example, if you donate at a local auction for a charity and receive sports tickets in exchange for the donation, you may only deduct the amount of the donation over and above the face value of the tickets.

Contrary to popular belief, the TCJA did not tax away the deduction for charitable contributions.  What it did do was nearly double the standard deduction for most taxpayers, raising the rate from $6,500 for single filers and $13,000 for joint filers to $12,000 and $24,000 respectively.  This increase thereby made the standard deduction more preferable over the itemized deductions in many cases.  And while not everyone that makes donations to charity does so in order to gain the deduction, it is an added benefit.  Many studies have been done indicating that contributions will drastically lower in the coming years to nearly a forty percent reduction.  Non-profits are hoping that people will still recognize the needs that are addressed by each of their given charities and will continue to give.  If giving is in your future, there are ways that may give you back the tax advantage of clearing the threshold and making itemized deductions a possibility.

One strategy is called bunching and the idea behind it is that instead of spreading your giving out from year to year, you give a larger amount in a single year.  For example, instead of giving $4,000 two years in a row, you can give $8,000 in a single year.  Of course, another option is to give a large amount every year that, in combination with your other itemized deductions, carries you over the threshold.

Another method is that you can give appreciated investments, such as stock shares, that allows you to deduct the full market value without having to pay capital gains on the appreciation, within certain limits.  If you are concerned about the value of your portfolio, you can take the cash that you would have donated to charity and use it to purchase identical investments to the ones donated. One can also still donate stocks to a donor advised fund and the charity will receive a check-in lieu of the stocks.  This is beneficial if the charity does not accept stocks.

Additionally, retirees ages seventy-and-a-half and older can transfer funds up to $10,000 from their IRA to a qualifying charity.  This qualified charitable distribution is better than a straight deduction of cash because the income is never reported as taxable income and the gift counts towards your required minimum distribution.  The tax benefit to the individual is the same regardless of whether or not they itemize, and the charity gains the benefit of the donation.

A final method is to make a charitable bequest and beneficiary designation to a charity of your choice in your estate planning.  You can leave a specific amount to the intended charity, designate a percentage of the total estate or sales of assets within the estate, or name the charity as a full or partial beneficiary of the estate, life insurance, investment accounts, bank accounts or any other account that contains a beneficiary transfer policy. 

Many people have focused their attention on the federal changes in itemized deductions and its effect on charitable giving.  But let’s turn our attention to state-level giving.  In many states, the state level has increased.  For example, in the state of California, those paying the highest level tax rate of 13.3 percent, would be able to claim up to $47.63 in reduced state and federal taxes on a one hundred dollar deduction.  That amount is now worth up to $50.30.  This is because, under the new law, the deduction for state taxes is capped at ten-thousand dollars.  So, for many taxpayers, the reduction in state taxes due to the charitable gift will now make no difference in their federal amount or taxes.

There are many different factors that go into tax strategy decisions.  You may determine that taking the standard deduction is the best tax benefit for you, and still give to an organization.  Or you may find yourself on the edge of making the itemized deduction a better benefit, and donations for charitable organizations may tip you over that edge.  Whatever your case may end up being, keeping charities and charitable giving strategies in mind is always a benefit.

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