While it's definitely true that generosity is its own reward, the tax benefits of charitable giving are a nice bonus. So even though you probably didn't think about taxes when you decided to donate to a worthy cause, the tax deduction for charitable giving has lowered the tax burden for many taxpayers who itemized instead of taking the standard deduction. However, the Tax Cuts and Jobs Act may inadvertently change how people feel about giving to charity.
The deduction for charitable donations has not been changed under the new tax law — you still must itemize to be able to claim it. But the new standard deduction for tax year 2018 is almost double the amount of tax year 2017. For individuals, it's $12,000 compared to $6,350 before, and for married couples, it's $24,000 as opposed to $12,700 previously.
What this means is that taxpayers will be less likely to itemize now than take the standard deduction. In fact, a recent congressional report estimates that 18 million households will itemize deductions for tax year 2018 compared with 46.5 million from last year. And most of those who take the standard deduction will not be able to receive the tax benefits of giving to charity, which could lead to less people making donations to worthy causes this year.
But there are several ways to make charitable donations and still get benefits.
Instead of giving the same amount of money each year, you could "bunch" two or more years' worth of donations into a single year. For example, let's say an individual taxpayer usually gives $10,000 to charity each year. To get the tax benefit of the donation even with the new, higher standard deduction, this taxpayer could bunch together two years of donations into a single year and pay $20,000 one year (while itemizing deductions) and zero dollars the next year (while taking the standard deduction).
Retired taxpayers age 70½ and older who must take an annual required minimum distribution (RMD) from their IRA are able to transfer that money to a qualifying charity. They can donate up to $100,000 directly from their IRA to a charity, which would satisfy part or all of their RMD without counting as taxable income. Then they can also claim the standard deduction.
Give Appreciated Assets
By donating assets that have appreciated in value over time, such as stocks, artwork, and real estate, taxpayers can avoid capital gains tax on the asset. When the donated asset is specifically appreciated stock, there's a second tax benefit — the new tax law maintains the ability to deduct the increased value up to 30 percent of the taxpayer's income. And any increased value above the 30-percent limit can be carried over and deducted for up to five more years.
More Money = Give Anyway
With the new tax brackets and lower tax rates created by tax reform, most taxpayers should have greater tax savings this year. Combine this fact with the higher standard deduction, and many potential donors could have more money available to donate to charity than before. So even though they wouldn't get a specific tax deduction for charitable giving, they could still get tax-related benefits that lead to extra money to give to a worthy cause.
Americans are some of the most generous and caring people on Earth. Even though these special tax breaks for charitable giving are nice perks, they're not the reason we donate. We give because we truly believe in the worthy causes we support and we want to make a positive difference in the world. So give until it feels good!
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