Are My Charitable Contributions Still Deductible?
2019 – 02/15 I have been practicing as a CPA for more than 30 years and for as long as I can remember taxpayers have been able to deduct their donations to charity and other non-profit organizations. Is this still true under the new federal tax law? Well, the answer to that question is a definitive “Maybe.”
One thing is clear: far fewer people will receive a tax deduction for their charitable donations in 2018 than in prior years. Let’s see why.
The higher standard deduction
Under the new tax law, donations to qualifying charities are still deductible – as long as you are able to itemize. The key question is whether the total of all of your deductions, including charitable donations, exceeds the new, higher standard deduction.
The new law doubled the standard deduction to $12,000 for an individual, $18,000 for a head of household and $24,000 for a married couple filing a joint return. If the total of your itemized deductions exceeds the standard deduction, you’ll itemize. If not, you’ll use the standard deduction and get no tax benefit from your charitable giving.
Until 2018, itemized deductions consisted of medical expenses, taxes paid (other than federal income tax), mortgage interest, charitable donations and miscellaneous items. The rules for charitable donations didn’t change, but they did become more restrictive for some of the others. For instance, the deduction for state and local taxes is capped at $10,000. So if your residential property taxes are $12,000 each year, you are only allowed a $10,000 deduction. Some restrictions apply to mortgage interest and medical expenses as well. And miscellaneous expenses are no longer deductible at all.
The net effect of these new restrictions and the higher standard deduction is that fewer people will be itemizing.
The “Maybe” comes down to this: Do your total deductible expenses exceed the new, higher standard deduction?
Let’s consider a simple example. A married couple’s deductible expenses for mortgage interest, medical expenses and state and local taxes total $15,000. This means the couple must have charitable donations of at least $9,001 to exceed the standard deduction amount of $24,000. If their donations are less than $9,000, they are better off using the standard deduction.
The math works the same way for your own situation. If you are married, your total deductions must hit that $24,000 threshold to itemize. If you have significant mortgage payments, healthcare costs or charitable giving goals, you may easily hit this mark, but many families will not. Until you are certain of your status, you should continue to keep complete records of all these expenses. You will need them if you do end up itemizing.
An alternate approach for seniors
If your deductible expenses are too low to itemize, is there any other way to reduce taxes through charitable giving? Again, the answer is “Maybe.” To take advantage of an alternative approach, you must have reached age 70 ½ and have one or more IRAs. Younger folks are out of luck on this one.
If you have reached age 70 ½, the IRS requires you to take required minimum distributions (RMD) from your IRAs each year. These distributions are taxable, like ordinary income. However, if you make a transfer from an IRA directly to a qualified charity, the donation will be excluded from your taxable income – resulting in a reduction in your taxes.
These IRA distributions to charity are known as Qualified Charitable Distributions (QCDs). Amounts distributed as QCDs can be counted toward satisfying your RMD for the year, up to a limit of $100,000.
It is important to note that to qualify, the distribution must be made directly to the qualified charity and not to you. Amounts distributed to you and then contributed to charity are counted and taxed as income. Then the contribution’s potential deductibility goes back to the standard deduction evaluation described earlier.
So let’s look at how this actually works. Let’s say your total deductions – even with an $9,000 contribution you’re planning to make to your favorite charity – fall short of the standard deduction, providing no tax benefit. Your alternate route is to direct $9,000 of your RMD requirement to the charity as a QCD. Then that $9,000 is not taxed as it otherwise would be. The charity benefits and you save up to several thousand dollars, depending on your tax rate.
So if you are required to distribute funds from your IRA each year and desire to make charitable donations, remember to discuss a Qualified Charitable Distribution with your financial advisor before any distribution is made.