How does the new Tax Cuts and Jobs Act (TCJA) affect the benefits of charitable giving? Here's what you need to know.
The new tax law preserves the deduction for charitable contributions and even increases the cash contribution limit. However, it also reduces or eliminates many other itemized deductions and increases the standard deduction, which could have an indirect effect on your ability to claim a charitable deduction.
In other words, it's not that the new rules scale back the tax benefits of donating to charity. It’s just that many taxpayers may find that it makes more sense to take the standard deduction rather than itemize, as they might have done in the past.
Whether or not you receive a tax benefit, charitable giving is always a worthy goal, so don’t let changes to the tax code affect your gifting plans.
How will my giving be affected?
To receive a tax benefit from charitable giving, you must itemize your deductions. According to the IRS data, only about 30% of taxpayers have historically itemized.1 And under the new tax law, estimates indicate that fewer than 10% of taxpayers will continue to do so.2
These changes will be most apparent to taxpayers who have traditionally itemized 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 did in the past, and they’ll end up not taking the charitable deduction.
On the other hand, those who have traditionally had larger annual itemized deductions are likely to continue itemizing because their donations (along with their other deductions) will tend to be greater than the standard deduction.
How can I maximize the tax benefits of charitable giving?
One way to potentially maximize your charitable deduction is to concentrate your giving into one year. This strategy could work if you have traditionally itemized and given to charities, but your total itemized deductions will be just below the new standard deduction going forward. Here’s an example of how concentrating your giving could increase your overall deduction for a two-year period.
Let’s say Jeff and Susan, a married couple filing jointly, normally have about $23,000 of itemized deductions: $13,000 of taxes and mortgage interest along with $10,000 of annual donations to a qualified charity. That $23,000 of itemized deductions is less than the new standard deduction, which means they will end up taking the new $24,000 standard deduction, since it provides the best tax benefit.
Jeff and Susan have two options going forward. They could just take the $24,000 standard deduction each year. Or, if they have the financial means, they could concentrate their charitable giving into year #1 by doubling their charitable donations. By concentrating their giving, they would end up donating $20,000 in year #1 and forgo the donation in year #2. This strategy would result in a $33,000 itemized deduction in year #1 and a $24,000 standard deduction in year #2, for a total of $57,000 in deductions over that two-year period. If they were to just take the standard deduction each year, they would end up with $48,000 of deductions over that same time period. By simply concentrating their giving, they could add $9,000 of deductions!
A great tool to help facilitate the concentrated giving strategy is a donor-advised fund (DAF). Establishing a DAF as a charitable giving vehicle allows you to make a charitable donation, receive an immediate tax deduction and then recommend where those donations should be granted over time.
With a DAF you could make a single large donation and then grant the funds to your favorite charities over a period of several years. While you’re waiting to disburse your donation, you can invest the gift, potentially allowing it to grow tax free and increase the amount of your donation down the road.
As with any tax strategy, it’s a good idea to meet with a tax or financial planning professional to go over your personal financial situation to make sure your tax plan maximizes your deductions and fits your needs.
1 “SOI Tax Stats—Individual Income Tax Returns Publication 1304 (Complete Report),” Internal Revenue Service, 10/02/18.
2 “Tables Related to the Federal Tax System as in Effect 2017 through 2026,” Joint Committee on Taxation, 04/24/18.
What you can do next
- Consider opening and contributing to a donor-advised fund (DAF) 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, if you itemize, and potentially 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.