What The New Tax Law Means for Your Charitable Donations

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Tax deductible donations have been affected dramatically since the Tax Reform Act of 2018 which went into effect for the 2018 tax year.

Although the sweeping tax cuts are beneficial for many Americans, charitable organizations were immediately concerned that the reforms would actually lessen the amount of charitable donations that would be made to worthy causes.

This is because, although many people donate to charities as their way of “giving back,” a far greater percentage of individuals give back in order to decrease the amount of taxes they have to pay.

With the rather large increase in standard deduction for single people (from $6,350 to $12,000), married filing jointly (from 12,700 to 24,000) and head-of-households (from 9,350 to $18,000), many people will no longer need to itemize their deductions to achieve that benefit.

Those taxpayers who will still benefit from itemizing deductions (estimated to be less than 30% of Americans) will doubtless continue to make tax deductible charitable donations. 

How can they best maximize their donations in order to help lessen their tax responsibilities?

The American Endowment Foundation reached out to CPA Mark Miller, who is a member of the AEF Council of Advisors. 

Mr. Miller’s solution, for those taxpayers who wish to continue to make charitable donations and receive a tax benefit for them, is to “bunch” one’s donations.

First, it is necessary to understand the SALT (state and local tax) deduction – available only to those people who itemized their deductions. Prior to President Trump’s tax reform, taxpayers could deduct an unlimited amount from their income, consisting of their mortgage interest, property taxes, and state and local income taxes. However, now that deduction has been capped at $10,000.

By bunching one’s donations – in particular by opening a donor advised fund (DAF).  According to Miller: 

“One vehicle that makes it easy for taxpayers to bunch their charitable donations is a donor advised fund (DAF). The taxpayer is able to claim the charitable tax deduction in the year of funding the DAF, and can make grant requests to the desired charities over one or more years.”

This strategy results in a permanent tax savings of thousands of dollars.

But what are tax deductible donations?

A tax-deductible donation is one given to a charity, but the giving must meet certain criteria.

For example, the Boy Scouts and Girl Scouts each qualify as a charity. But if you purchase $100 worth of popcorn or cookies from someone selling door to door or outside a grocery store, that is not considered a tax-deductible donation because you’re actually eating the food you’ve purchased. You’ve “purchased a product at fair market value.” 

However, if you take that $100 purchase of cookies or popcorn and in turn give it to food pantry (and get a receipt for it) – you can then deduct that cost as a charitable donation because you are not benefitting from it.

To ensure that a charitable organization qualifies for tax-deductible donations, they must state somewhere on their literature that they are a 501(c)(3) entity, where “c” stands for charity. The charity will typically also place on its literature, “All donations are tax deductible.” If they don’t do this, you will not be able to claim a deduction on your taxes for that particular donation.

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