With the holiday season soon upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 28% tax rate, you might be able to give $1,389 to charity ($1,389 x 28% = $389 taxes saved). On the other hand, with a 35% tax rate, you might be able to give $1,538 to charity ($1,538 x 35% = $538 taxes saved).
A word of caution
Be sure to deal with recognized charities and be wary of charities with similar sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, telephone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Exempt Organizations Select Check search tool. And don't send cash; contribute by check or credit card.
Tax deduction for charitable gifts
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. However, the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 50% of your AGI for the year, and other gifts to charity may be limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years. Your overall itemized deductions may also be limited based on your AGI.
Make sure you retain proper substantiation of your charitable contribution for your deduction. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
Year-end tax planning
When making charitable gifts at the end of a year, it is generally useful to include them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.
For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.
Changes in 2018 Resulting from New Tax Laws
Let’s say that in 2017 and in 2018 your personal and financial situation is the following:
- you’re married
- you file jointly with your spouse
- you’re not subject to phase out rules or Alternative Minimum Tax (AMT)
- you donate a total of $7,500 to 501(c)(3) charities
- you pay $20,000 in real estate taxes
- your mortgage interest was $3,500
In 2017, 100% of the above ($7,500 + $20,000 + $3,500 = $31,000) “counts” towards your itemized deduction. Also, it’s above the 2017 standard deduction rate of $12,700 given your personal situation.
In 2018, the maximum you can deduct for your real estate taxes will be $10,000 and the standard deduction rate rises ($12,700 to $24,000 in this scenario). That means that your itemized deduction is valued at a total of $21,000 ($7,500 + $10,000 + $3,500) instead of $31,000 and is LOWER than your standard deduction rate of $24,000.
Bottom line for you in the above example:
- In 2017, you’d be able to deduct a maximum of $31,000
- In 2018, you’d be able to deduct a maximum of $24,000
Because of these changes, we recommend discussing your charitable giving plans with your Basepoint Wealth Advisor and/or your accountant to decide how your actions may influence or be influenced by new tax rules.