The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party, nor should the analysis be considered tax advice.
How do the changes to the tax code affect the benefits of charitable giving? It's complicated.
The law preserves the deduction for charitable contributions, so nothing changes there. However, it also scraps or shrinks many other itemized deductions and increases the standard deduction. As a result, many taxpayers may now find it more beneficial to just take the standard deduction than to itemize, even if they give to charity.
In other words, it's not that the new rules scale back the tax benefits of donating to charity. It’s that many taxpayers may find it makes more sense not to claim them now that the standard deduction has been increased.
Either way, giving to charity is valuable for reasons that go beyond the tax benefits, so we would encourage people to think carefully before making any major changes to their charitable plans.
Will I be affected?
Today, only about 30% of taxpayers itemize their deductions, according to the IRS. It has been estimated that fewer than 10% of taxpayers will continue to itemize under the new law.
The change will be most apparent to taxpayers who itemize their deductions and give small to moderate amounts to charity. This group will likely find that the increased standard deduction will lower their tax bill more than itemizing would, and will end up not taking the charitable deduction.
On the other hand, those who continue to have larger annual itemized deductions, including substantial charitable donations, are less likely to be affected by this issue, because their donations along with their other deductions will tend to be greater than the standard deduction. If their itemized deductions surpass the standard deduction, they are likely to continue to itemize and get the full tax benefit of their charitable contributions.
Should I do anything now?
Some advisors may suggest that you accelerate giving into 2017, in case you end up taking the standard deduction instead of the itemized deduction in 2018. Again, charitable giving is always a worthy goal, so don’t let changes to the tax code affect your gifting plans.
If you do go this route, remember that the donation will need to be made before Dec. 31 to count for 2017. If you’re considering a larger contribution, a long-term gifting strategy, or have other questions unique to your situation, year-end is always a good time to talk with your financial planner or a tax advisor.
Another option would be to increase your giving next year. If you give more, your total itemized deductions could end up being larger than the increased standard deduction. Here’s an example: Let’s say a married couple has $23,500 of itemized expenses, including a $2,000 donation to a qualified charity. If the couple donated an additional $1,000 to that charity, their itemized expenses would surpass the $24,000 standard deduction and make it possible to claim the charitable deduction.
It’s also worthwhile to explore tax-efficient options for charitable giving, such as a donor-advised fund, which allows you to contribute cash, appreciated assets or investments that have been held for a year or more without paying capital gains taxes. You can take one large deduction in the year you make the contribution, and then spread out distributions to the charities of your choice over multiple future years, or when it makes sense to you. This can help maximize your contributions to charitable organizations that are important to you.
What you can do next
- Consider opening and contributing to a donor-advised fund account, which allows you to contribute cash, appreciated assets or investments that have been held for at least a year. This special-purpose charitable account enables you to take one large current-year tax deduction and avoid paying capital gains tax on the sale of the appreciated assets. You can invest funds for potential growth, and then grant to charities of your choice over time.
- 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.