What you need to know before donating to charity

It might not be as easy as donating once a year

Pamela Wheeler, EA, estate tax, gift tax, estate planning

Pamela Wheeler, EA

With the change in the tax law under the Tax Cuts and Jobs Act (TCJA), the tax deduction on Schedule A of your tax return is now capped at $10,000. Miscellaneous itemized deductions subject to the 2% adjusted gross income (AGI) limitation have disappeared. Additionally, the standard deduction amount has significantly increased to $12,200 for individuals and $24,400 for a married couple filing a joint return in 2019. These changes mean more people will report the standard deduction in their tax returns versus itemizing deductions.

For example, if the maximum amount of taxes you can deduct in 2019 are capped at $10,000, you made $5,000 of charitable donations during the year, have no other deductions, and file a joint return, your total itemized deductions would be $15,000, but your standard deduction is $24,400. You would, of course, report the $24,400 standard deduction. This means you received no tax benefit from making $5,000 charitable donations since you would be able to use the $24,400 standard deduction whether or not you donated the $5,000 to charity. Or if you are filing your return as a single taxpayer, your total itemized deductions would be $15,000 which is higher than the standard deduction of $12,200, but you only really receive a tax benefit from $2,800 of your total $5,000 charitable donations. In other words, you are only benefiting for the amount donated over the $12,200 standard deduction.

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So, is there anything you can do to get better income tax results from your charitable donations?

You could bunch a few years of charitable donations into one year. For example, if you normally donate $5,000 per year, donate $20,000 or $25,000 in one year to get your itemized deductions well over the standard deduction amount. In the next few years, don’t make any charitable donations, only reporting the standard deduction on your return.

But you might say, “I give to charities that count on my donation each year for their operations.” A solution would be to set up a Donor Advised Fund, contribute a large amount to the fund in year one, and make annual distributions to charities out of the fund over the next few years. The initial donation to the Donor Advised Fund is a charitable deduction in the year you made the transfer into the Donor Advised Fund, but you do not receive a deduction for distributions out of the Donor Advised Fund to charities in the future years.

While cash is often the easiest donation to make, don’t forget you can also donate publicly traded stock directly to a charity or to Donor Advised Fund. This is a good way to transfer a large sum at one time and not recognize the capital gain associated with raising the cash for the donation. This is a great idea if you have publicly traded stock with a low-cost basis since you receive a charitable deduction for the fair market value contributed and avoid paying tax on the sale of the security. The TCJA also raised the AGI income percentage limitation from 50% to 60% for tax years 2018 – 2025 for cash contributions, allowing for potentially a larger deduction depending on your income.

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If you are over the age of 70 ½ and have a traditional Individual Retirement Account (IRA), you might consider another option. You can make a “qualified charitable distribution” (QCD) directly from your IRA to a charity or charities of up to $100,000 per year. The distribution counts as part of your required minimum distribution, but the cash transferred out of your IRA to the charity is not considered taxable income to you, providing an income tax benefit from the donation even though you are not itemizing your deductions. Some of the IRA custodians now offer check-writing ability from your IRA account, making it easier for you to make multiple, small donations, directly from your IRA throughout the year.

No matter how or when you ultimately make your charitable donations, don’t forget the rules. Prior to the time you file your tax return and for all donations of $250 or more, you must have a receipt from the charitable organization indicating the date and amount donated, and a statement regarding whether the charitable organization provided any goods or services in exchange for the contribution. A bank record, such as a check copy, or bank statement will work to support donations of less than $250.  Using a check for small donations, rather than donating cash, may be preferable. A donation to a “Go Fund Me” account is generally considered to be a personal gift and is probably not tax-deductible.

If you ever need help with your charitable contributions, please contact a Henry+Horne advisor.

 

Pamela Wheeler, EA, MST, CSEP, specializes in the taxation of trusts, estates and individuals. She can be reached at (480) 483-1170 or PamelaW@hhcpa.com.