The Tax Cuts and Jobs Act, which went into effect on January 1, was the most sweeping tax-code overhaul in decades. It affected not only corporate and individual tax rates but also how taxpayers itemize their deductions—which could impact charitable donations and the organizations that rely on them. We sat down with Hayden Adams, CPA and director of tax and financial planning at the Schwab Center for Financial Research, to find out how.
First things first: What are the biggest changes taxpayers should know about?
The biggest change is to tax rates and tax brackets. Because of these changes, more income will be taxed at lower rates. In addition, the standard deduction has been increased, while some itemized deductions have been limited or eliminated.
Are charitable donations still deductible?
They are, but only if you itemize—something fewer households are likely to do now that the standard deduction has been increased. It’s estimated that 90% of taxpayers are likely to take the standard deduction, meaning the vast majority won’t receive a tax benefit for their charitable giving. That said, many people give because they want to support the causes they care about, not because of a tax deduction.
For those who continue to itemize their charitable deductions, have the rules changed?
Yes, in two ways that should benefit donors. First, taxpayers are now permitted to make cash contributions of up to 60% of their adjusted gross income (AGI)—up from 50% previously. Second, the Pease limitation, which reduced the value of a taxpayer’s itemized deductions by 3% for every dollar of AGI above a certain threshold, was eliminated entirely.
Are there ways for those who take the standard deduction to give more tax-efficiently?
There are, especially for those who are just shy of the itemized-deduction threshold. Taxpayers in this situation should consider concentrating their giving into a single year because once their charitable and other deductions exceed the standard deduction amount, they can itemize. A great tool to help plan your giving is a donor-advised fund (DAF), which allows the account holder to donate in the current year (and potentially get that itemized deduction) without having to decide right away which organization or organizations should benefit.
Another strategy is to donate appreciated assets, which are still tax-advantaged under the new law. With this approach, you give those assets directly to a charity or DAF. Because those donations aren’t subject to capital-gains taxes, this approach can maximize both your donations and your deductions, potentially pushing you over the standard-deduction threshold.
Are qualified charitable distributions (QCDs)—which allow those 70½ or older to gift up to $100,000 from an IRA directly to a qualified public charity—still permitted?
QCDs weren’t affected by the new tax law and can still be used to satisfy some or all of the required minimum distributions (RMDs) from tax-deferred retirement accounts—giving you more control over your taxable income and, by extension, over the taxability of Medicare and Social Security benefits.
Gifting directly from your IRA maximizes your donation because the amount is not reduced by taxes. Unlike gifting appreciated assets, however, giving QCDs isn’t tax-deductible.
What else should taxpayers know about the charitable deduction?
Of all the itemized deductions available to you, the charitable deduction is perhaps the most flexible in that you can control both the amount and the timing of your donations. And, as with all tax decisions, it’s a good idea to meet with a tax or financial advisor to determine the best charitable-giving strategy for your situation.
What You Can Do Next
- Read more about how recent tax legislation could affect you.
- If you have questions about donor-advised funds or need help with philanthropic planning, call Schwab Charitable at 800-746-6216, or contact your advisor.
- If you need help with your financial plan, Schwab can help. Learn more about investment advice at Schwab.