Charitable Contribution Considerations for 2018
As you may be aware, the Tax Cuts and Jobs Act includes a number of changes that will likely impact your 2018 taxes. The standard deduction has increased from $12,700 to $24,000 for married filing jointly and from $6,350 to $12,000 if your filing status is single.
While on the surface this seems positive, many people in the middle class might find themselves in a position where they no longer receive meaningful tax savings from their charitable giving.
How could that be?
Consider the following example:
Bob and Sue are married filing jointly and together their income is $150,000. They donate $15,000 a year to local charities and have other itemized deductions of $10,000, such as medical expenses, property taxes, and mortgage interest expense. Their total itemized deductions are $25,000. Because the new standard deduction is $24,000, and their total itemized deductions are $25,000, their itemized deductions are only $1,000 greater than someone who simply takes the standard deduction and does not give financially to their local charities. Since Bob and Sue are in the 22% tax bracket and their itemized deductions are only $1,000 over the increased standard deduction and their $15,000 gift only reduces their tax liability by $220, compared to others with no charitable giving throughout the year.
What is the solution?
One solution may be bunching of expenses. In this case, bunching means lumping multiple years' worth of charitable giving into the same tax year. For example, instead of giving $15,000 in December 2018, Bob and Sue could instead give $15,000 in January 2019 and $15,000 again in December 2019. This would allow them to take the standard deduction in 2018 and itemize in 2019. If they bunched their charitable donations for 2018 and 2019, they could possibly save over $3,000 in taxes. They would then alternate every other year with the standard deduction and itemizing. While tax savings are not the only reason people support nonprofits and local charities, people do enjoy receiving the tax savings and careful planning can maximize these benefits.
HHM tax professionals understand the new tax laws and are available to help. Contact one of our tax professionals to review your 2017 tax return and discuss 2018 planning opportunities that may be beneficial to you and your family.