The Tax Cuts and Jobs Act (TCJA) will generally have minimal impact on charitable giving for higher-income taxpayers. In prior years, charitable contributions were the third largest itemized deduction, but they may soon take the lead through enhanced planning techniques to maximize their benefit under the new law changes. Charitable contributions are one of the few deductions enhanced under the Act, which increased the AGI limitation on cash contributions from 50% to 60%. The 30% limitation on contributions of appreciated assets still applies.
The IRS announced that individuals who intend to make large gifts between 2018 and the end of 2025 can do so without concern about losing the tax benefit of the higher exemption level once it decreases after 2025. (IR-2018-229)
Charitable contributions are an excellent method to reduce your tax bill in addition to supporting your favorite charities of choice and helping to support your community. There are a couple of small changes to charitable giving rules that might affect you, but if you keep in mind the various rules and limits, charitable giving can continue to play a key role in your tax planning.
When is the best time to make charitable contributions?
Charitable deductions are one of the most flexible tax planning tools because you can control the timing to best meet your needs. You may be wondering when you should make your charitable contributions: before the end of the year or after New Year’s Day? The question may seem simple, but the answers can get quite complicated.
What tax rate will your deduction be saving you this year vs. next year?
To determine this, you will want to understand what makes up your basket of taxable income. Does one year consist mostly of long-term capital gains or qualified dividends that are taxed at a lower rate than wages, SE income or retirement plan distributions? Additionally, what tax bracket are you expecting to be in? If you’ve had a high-income year this year that will push you into the top tax bracket but expect only to be in one of the lower brackets next year, then it’s better to take that deduction now and offset your high tax.
The tax benefits of charitable contributions vary depending on the taxpayer’s individual situation. Depending on the type of contributions made, the IRS has placed some limitations on the amounts that can be claimed as a deduction on a return.
Outright gifts of cash (which include donations made via check, credit card and payroll deduction) are the easiest. The substantiation requirements depend on the gift’s value:
- Gifts under $250 can be supported by a canceled check, credit card receipt or written communication from the charity.
- Gifts of $250 or more must be substantiated by the charity.
For donations under the adjusted gross income (AGI) limits, the reduction in tax liability will depend on the tax bracket the taxpayer is in. The taxpayer must itemize deductions on Schedule A and may be subject to overall Schedule A deduction limits that have been put in place for higher income taxpayers.
- The total cash contributions a taxpayer can make in any given year cannot exceed 60% of the taxpayer’s AGI for the year or 30% if made to a private non-operating foundation (with some exceptions).
- There are 30% and 20% limitations placed on contributions of non-cash appreciated property, depending on the type of qualified organization.
- If the donation amounts exceed these thresholds, the excess deduction can be carried over to future tax returns for five years.
- Donations to qualified charities generally are fully deductible for regular tax and AMT purposes and can also help higher-income taxpayers reduce their estate tax exposure.
Charitable contribution deductions are allowed for AMT purposes, but your tax savings may be less if you’re subject to the AMT. For example, if you’re in the 37% tax bracket for regular income tax purposes but the 28% tax bracket for AMT purposes, your deduction may be worth only 28% instead of 37%. In addition, other tax benefits can be realized by the many different forms of charitable giving, including donated appreciated assets thereby saving the capital gains taxes on those assets.
The PATH Act made permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRA to qualified charitable organizations up to $100,000 per tax year. The taxpayers can’t claim a charitable or other deduction on the contributions. But the amounts aren’t deemed taxable income and can be used to satisfy an IRA owner’s required minimum distribution.
To take advantage of the exclusion from income for IRA contributions to charity on your 2018 tax return, you’ll need to arrange a direct transfer by the IRA trustee to an eligible charity by Dec. 31, 2018. Donor-advised funds and supporting organizations aren’t eligible recipients.
11/9/18: Non-cash gifts such as artwork could be a smart move if you plan to itemize your deductions. Top capital gains rate for sold appreciate artwork 28%. To maximize benefits, including the possibility of deducting the donation's full fair market value, be sure to: donate to a public charity and not a private foundation; confirm that the charity will use the artwork for a purpose related to its tax-exempt status; and obtain an appraisal from a "qualified appraiser" (as defined by IRS Publication 561).
Qualified Charitable Organizations
In order for taxpayers to deduct charitable contributions, they must be made to a qualified organization and not for the benefit of a specific individual. The following are a few examples of organizations that qualify:
- most nonprofit organizations such as American Red Cross and Goodwill
- nonprofit hospitals
- educational organizations
- nonprofit organizations that service public parks and recreational areas
- community foundations
- private foundations
- charitable trusts
Taxpayers can ask any organization whether or not it is a qualified organization, and they should be able to inform the taxpayer accordingly. The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://www.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.
To ensure charitable donations will be deductible on your 2018 return, you must make their “unconditional delivery” by Dec. 31 and the organization must be eligible to receive tax-deductible contributions. The delivery date depends in part on what you donate and how you donate it.
Here are a few examples for common donations:
- Check. The date you mail it.
- Credit card. The date you make the charge.
- Pay-by-phone account. The date the financial institution pays the amount.
- Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
As with many areas of tax planning, the question of when to make your charitable contributions can be difficult to answer. Contact a professional to help guide you through year-end planning and make the most of your deductions.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.