Deducting Charitable Donations: How it Works Under the New Tax Law
Up until 2018, charitable giving was a win-win for many people who itemized their taxes. The non-profit received a donation and the taxpayer often benefited by deducting charitable donations.
However, the Tax Cuts and Jobs (TCJA) Act that became law in December 2017 has narrowed the opportunity for deducting charitable donations because of two factors:
First, the TCJA eliminated the ability to take these tax deductions on your personal tax return: from tax prep fees to job-related expenses for employees, investment fees to home equity loan interest. And it reduced the deduction for state income tax and real estate taxes to a maximum of $10,000. By shortening the list of allowable deductions it is now more difficult for many people to surpass the threshold of the standard deduction.
Second, the TCJA has significantly raised standard deduction levels – almost doubling them – from $6,350 to $12,000 for a single taxpayer, and $12,700 to $24,000 for married taxpayers filing jointly. From 2018 onward, if your itemized deductions – including charitable contributions – fall below these higher thresholds, you are forced to take the standard deduction.
Yet, if philanthropic giving is important to you, there are still strategies for regaining that “win-win” advantage by deducting charitable donations. Let’s take a closer look at 4 options for using donations to improve your tax posture.
1) Donor Advised Funds: An Excellent Strategy for Deducting Charitable Donations
Donor advised funds are one of the best ways to continue supporting non-profits year after year, while improving your tax posture by deducting charitable donations. Here’s an example of how it works:
For years, Maria has made an annual donation of $1,500 to her local United Way chapter. After adding up her other allowable deductions for 2018 – such as mortgage interest – Maria arrives at a total of $9,000 in itemized deductions.
She would like to make her annual $1,500 donation to the United Way. Maria realizes that her total itemized deductions would be $10,500 – meaning deducting charitable donations will not yield any tax benefits for her in 2018. Why? Because $10,500 falls below the standard $12,000 deduction.
That’s where donor advised funds come into play for deducting charitable donations. Maria can set up a donor advised fund which allows her to donate $4,500 in 2018, which will then be distributed to the United Way in payments of $1,500 over the next three years.
Now, Maria’s itemized deductions for 2018 add up to $15,000 which is over the $12,000 standard deduction. She is now able to benefit from $3,000 in tax deductions that she otherwise would have lost if she only donated $1,500 this year. She gains the advantage of deducting charitable donations – and the United Way continues to receive her support.
Interested in setting up a donor advised fund? Many community foundations offer donor advised funds. In addition, wealth management companies like Fidelity and Charles Schwab offer programs. Here is a comparison of major donor advised funds. Pay close attention to account minimums and management fees, as they can add up quickly!
2) Deducting Charitable Donations Through Your Business
It may now make sense to do your charitable giving through your business – but it’s not as simple as it sounds.
First, if you are a pass-through entity like an LLC, sole proprietorship, or S corporation, deducting charitable donations will occur on Schedule A (1040) of your personal tax return. So, it makes no difference whether you – or your business – writes the check. Corporations can deduct charitable contributions, but only a handful of small businesses operate as corporations.
In general, deducting charitable donations as a business expense is not permissible by the IRS. However, a great way to support a non-profit, and be able to categorize that support as a business expense is to purchase advertising in a non-profit’s event program – or sponsor a charitable event. Advertising is a business expense regardless of if you purchase the ads from a for- or not-for-profit entity.
As a side note, now more than ever it is imperative that your business is set up as the correct entity in regards to the TCJA Tax Law. For example, here at Robert P. Russo, CPA, many of our clients are asking: should my business be an S corporation? Check out the link, then get in touch with us for more details.
3) Donating Stocks to Charities
Let’s look at another “win-win” approach to deducting charitable donations. Let’s say you purchased stocks a decade ago at $1 each. Today, those stocks are worth $10. If you were to cash in those stocks, you’d be taxed on the gains: which would be $9 per share. Instead, you could donate those appreciated assets to charity – or even to a donor advised fund. Then you’d be deducting charitable contributions on your tax return at the full market value of $10 per share. You would also be avoiding those hefty taxes on the capital gains. And of course, the charity would be benefiting from your generous donation.
Ultimately, your goal when it comes to deducting charitable donations is to get over that $12,000 or $24,000 (if filing jointly) standard deduction threshold. There is a misconception that the new TCJA Tax Law has eliminated opportunities for deducting charitable donations. That’s simply not true. Yes, the TCJA has just made it more difficult to get past that standard deduction point, but it’s still possible.
Many of our clients here at Robert P. Russo, CPA have been generously donating to charities for years. We’re helping them continue to support their favorite causes, while also ensuring they’re benefiting from the “win-win” approach. Contact us to learn more about your options when it comes to deducting charitable donations.