During the past two weeks, I have seen advice like “accelerate planned 2018 charitable contributions into 2017 to take advantage of itemizing rules under current tax law.” Why? It is often property tax, mortgage interest, and/or state income tax, combined, that has allowed people to exceed the standard deduction and itemize and deduct charitable contributions. In 2018, standard deductions are almost doubling and there will be a $10,000 cap on state and local tax (SALT) deductions. Many people who previously could itemize income tax deductions won’t be able to any more.
While advice to time-shift planned 2018 charitable contributions forward might be sound financially, it seems to imply that people will have one “last hurrah” and then stop donating to charities because they can no longer take an itemized tax deduction. This would be a devastating loss for our local communities.
Let’s take a reality check. Only about 30% of tax returns nationally had state and local tax deductions in 2015. In New Jersey, the percentage of tax returns claiming SALT deductions was 41% according to the Tax Policy Center. Thus, a majority of Americans and New Jerseyans have not been able to itemize deductions for charity for a long time, not just starting next year. Some people were unable to claim SALT deductions due to the alternative minimum tax (AMT) and others came out ahead by taking the standard deduction.
Yet, many Americans, who have not been able to itemize tax deductions, have given generously to charities in their local communities, schools that they graduated from, and other worthy causes. Why? Because there are other benefits to making charitable contributions beyond tax savings: helping other people, “paying it forward,” paying back organizations that helped you get ahead, and a personal sense of satisfaction that comes from doing something that is positive, valuable, and worthwhile.
The reality, however, is that not everyone who previously itemized tax deductions will be able to afford to be as generous as they were in the past (i.e., their income tax bill may be rising as a result of the SALT cap or other tax law changes contained within the Tax Cuts and Jobs Act). That’s okay. Give what you can.
Here’s an idea to consider if you are negatively affected by recent tax law changes. I call it the “Make Yourself Whole Charitable Gifting Strategy” for those who previously itemized tax deductions and will no longer be able to itemize. Starting in 2018, give to the extent of your previous out-of-pocket cost for contributions in the past. For example, if you used to donate $2,000 annually and $500 was written off as an itemized deduction in the 25% marginal tax bracket, give $1,500 in the future. If you donated $4,000, give $3,000 and if you donated $10,000, give $7,500.
The result is that there will be little or no impact on your future cash flow. If you are fortunate enough to earn more money in the future, you can go back to making larger contributions again later.
If you need to prune future charitable contributions, be deliberate and intentional and develop an annual charitable contribution budget. For example, you might include:
- National or local organizations that do outstanding humanitarian work
- Organizations that you volunteer for (e.g., a local church or fire department)
- Professional associations that support your career
- Organizations that have helped you or your family (e.g., hospice, 4-H, or a local ambulance squad)
Conversely, if you are among the fortunate ones who will benefit financially from the Tax Cuts and Jobs Act and pay less tax than before, consider increasing your charitable contributions next year to “pass it along.” The Wall Street Journal has a calculator to help users estimate how the new tax law will affect them personally.
Bottom Line: Charitable organizations will need everyone’s support as much in the future under the new tax law as they did in the past. This is especially true if government funding for non-profit agencies, Medicare, Medicaid, and other social support services is reduced as some are predicting. Income tax deductions are just one factor in the decision to make charitable donations. Giving money to effective, high-impact charitable organizations and less fortunate people, when you are able, will always be the right thing to do.