The Tax Cuts and Jobs Act did not eliminate the tax deduction for charitable gifts, but the new tax laws have changed some of the rules.
Perhaps the biggest change is that the standard deduction nearly doubled as a result of the new tax law–it’s now $12,000 for singles, $24,000 for married filing jointly, and $18,000 for head of household. (In 2017, these amounts were $6,350, $12,700, and $9,350, respectively.)
Charitable contributions are only deductible as itemized deductions, and taxpayers must choose the larger of the standard deduction or the total of their (allowable) itemized deductions. When you also factor in some changes affecting (and in some cases eliminating) itemized deductions, it could be prove more difficult to amass total itemized deductions that exceed the new higher standard deduction.
Among the changes, the amount of the deduction allowed for state and local sales, income, and property taxes is capped at $10,000 for both single filers and married filing jointly ($5,000 for married filing separately). Also, certain itemized deductions such as theft and casualty losses were eliminated (with the exception of damage resulting from a federally declared disaster). Unreimbursed employee expenses an other miscellaneous expenses are also no longer allowed.
In addition, some changes were made to the mortgage interest deduction; generally mortgage interest is still deductible if the mortgage does not exceed $1 million for tax years prior to 2018 and $750,000 for tax years after 2018. Interest on home equity loans is no longer deductible unless the loan was used to improve the residence that secures the loan.
Medical expenses are still deductible if they are in excess of 7.5% of adjusted gross income; this “floor” is actually lower than it was before (10% of AGI).
And lastly, charitable contributions are still deductible, with slightly modified rules: Cash contributions to public charities are deductible up to 60% of a donor’s AGI for the tax year. Previously, this was capped at 50%.
How to Maximize Itemized Deductions
The tax deduction may not be the main impetus for most people give money to support causes they believe in; in fact, only around 30% of taxpayers have itemized their deductions in recent years. That said, one tax-planning strategy that might benefit charitably inclined investors is “clumping” or bunching deductions: choose certain years to maximize itemized deductions so they are in excess of the standard deduction. For example, in a year with medical costs exceeding 7.5% of AGI (the threshold for medical deductions), it could be beneficial from a tax perspective to be especially charitable, too.
One vehicle that could be especially beneficial in years with bunched deductions is donor-advised funds. Donor-advised funds allow donations of virtually any amount to the account and receive immediate tax benefits for doing so. But even though you’ve given up control of the assets and can’t reclaim them, you can take as long as you want to decide when, how much, and which charity gets paid from the donor-advised fund account.
In addition, donor-advised funds can be a good choice for investors looking to make an in-kind donation of appreciated securities or assets, because they are often better equipped to accept a wider variety of asset types than smaller charitable organizations. Donating appreciated securities or assets is another way to maximize donations: Donate appreciated real estate, stocks, mutual funds, etc. at fair market value and avoid the capital gain tax on appreciation, while still claiming the charitable deduction.