Update: As predicted in the article below, charitable donations took a big hit, post Tax Reform, with 61% less charitable tax deductions claimed. As a COVID financial relief measure, there was a new universal donation deduction provision in 2020 (extended to 2021 and increased to $600 for “married filing jointly” and $300 for “married filing separately”). Additionally, individuals can deduct up to 100% of their AGI on charitable donations in 2020 and 2021. The universal donation deduction has expired and maximum charitable donation deduction amounts have reverted to prior levels for 2022 and 2023.
There’s currently a lot of discussion about the impact of the Republican tax plan, which now has been calculated to have a net result of higher taxes on everyone – minus the top 1% – in order to cut taxes for that income group and big corporations. I won’t get in to all of the implications and politics again (not much has changed since my prior analysis other than the addition of a premium increasing elimination of the ACA individual mandate). But, I do want to highlight something that could be dramatically impacted by the plan that is getting almost zero press: the impact on charitable donations.
Here’s the crux of it: charitable donations are tax deductible, so long as you itemize your taxes. One of the staples of both the Senate and House versions of the tax bill is that it would nearly double the standard deduction for individuals and families versus previous amounts. A higher standard deduction means less itemized tax returns.
Somewhat surprisingly, only 30% of individuals itemize their taxes currently, and it’s estimated that with the higher standard deduction, the number of itemizers would drop to a mere 5% (typically the wealthiest 5%). One of the unfortunate side effects of this is that charitable donations will take a huge hit. According to a May study by the Lilly Family School of Philanthropy at Indiana University, this reduction in itemizing taxpayers would reduce charitable giving by $4.9 billion to $13.1 billion annually. Charitable organization will become reliant strictly on good will, without the tax deduction incentive to stimulate giving. That would have disastrous consequences for organizations that do incredible work all across the country.
On a personal level, it also means that all of that stuff in your home that you’ve been meaning to donate to local charities could potentially lose its charitable donation value as soon as the end of this year, if the Republican plan is passed “as is”.
What can you do about this?
If you itemize, donate! Use this possible change in the tax code as motivation to get up off your butt, go through every single item that you own, and donate as much as you possibly can to your favorite organizations by the end of this year (as well as make higher cash donations than you typically would). If this change does not go through, the worst thing that could happen is you have a cleaner home and help out some great charitable organizations.
This possible change to the tax code will impact me personally – and I’m sure it will impact many of you as well. I’ve been itemizing my taxes and donating heavily to charity for as long as I have been a homeowner (the last 13 years), but with the increase in the standard deduction, it will no longer make sense for me to itemize. As I was writing this article, I turned to Mrs. 20SF and said, “we need to go through every item we own and donate as much as we can by the end of the year.”
How much in charitable donations can you deduct?
As I previously highlighted in my article on the maximum charitable donation deduction amount (referenced above), it depends on your adjusted gross income (AGI). According to IRS publication 526 (the gospel for qualified charitable contributions):
The amount you can deduct for charitable contributions generally is limited to no more than 60% of your adjusted gross income. Your deduction may be further limited to 50%, 30%, or 20% of your adjusted gross income, depending on the type of property you give and the type of organization you give it to.
Check out that post for more details and resources, but at the least, make sure you understand how much you can deduct and collect charitable donation receipts.
Even if you take the standard deduction, please don’t stop donating. Charitable organizations need us more than ever to do their good work.
I wrote about this on my FB page earlier this month. If I cannot deduct donations, I will make fewer of them. No ifs, ands, or buts. I also pointed out how much more stuff will end up in landfills as the incentive to drag it to the donation center declines.
Yes, very concerned about the impact on the environment. When given the choice between walking over to their trash can or loading up their car to drive over to a charity, I fear many will choose the path of least resistance. I won’t – but many will.
Dissapointed…a Gift is something you do without expecting something in return. If in your heart the most important thing is making sure you get a tax deduction then it is definitely messed up. This country is truly spoiled. Rushing to make sure you get this as fast as possible makes no sense. Actually very sad!
To be clear, I don’t think everyone should rush out to donate and then stop afterwards. I stated, “if the ability to deduct on donations goes away for you, please don’t stop donating in the future.”
However, if there are deductible donations there to be had, it is a wise financial move to get them while you still can.
He was aiming that at me. My honesty is offending him. Too bad. The reality is that there are plenty of people who will not want to invest the time and effort to donate stuff without the reward. It is what it is. Donating money is easy. Packing up stuff and dragging it to the donation center is not (and don’t go yelling at me that they pick up – they do not pick up everywhere). On the plus side, December should set a record at the donation centers!
Honestly I don’t find this to be a big problem with the tax code. The less decisions are made based on their impact to your federal taxes the better. I’d prefer a tax code with no deductions, they just create artificial market impacts. Especially the mortgage interest deduction, really hate that one and the artificial price inflation based on both the actual and mistaken understanding that it subsidizes mortgage payments.
The biggest problems I see with the tax bills are the complete disregard for national debt, and the expiration of individual tax cuts which only further mask the debt problems from the implicit expectation these cuts will really be extended at expiration. That and the extreme imbalance of all that new debt being used to benefit the wealthy and huge corporations who have absolutely no need for more money, but yay stock prices…?
Of course this tax bill reduces charitable giving. Why not? Well, that’s reason #2 not to donate to The Sierra Club. (#1 being that climate change is a hoax) I feel like we have a comic book super-villian for president.
How the heck can we stop this new tax plan?? Slashing taxes on the 1% and mega corps while increasing income taxes for the working class and increasing taxes on small businesses and possibly taking away pre-tax retirement deductions and charitable deductions now… is Congress f’ing insane? I mean I get they are all corrupt as hell but that they are just blatantly flaunting how much they are not working for the majority of american people is ridiculous.
I am not sure I buy the premise that just because you lose the tax deduction that there would be a significant decrease in overall charitable giving. Let’s look at the great work that JJ Watt did for the city of Houston. Yes, there were large deductions by multi-millionaires but there was plenty of donations by a wide variety of people. I don’t think people were thinking “I’ll give 100 dollars because I know that is really only 75 out of my pocket since I’ll get 25 back at tax time”. Do I think there are people out there that donate with this in mind… yes. Do I think that they make up the majority of those who give… no. I also think that if I have a bag of items to take to Goodwill or another charitable organization I won’t just chuck it in the garbage bin. I think all of the points you made above are less to do about taxes and more to do about the person giving. Kudos though on the plug for more donations, especially during the holiday season!
I will continue to donate to charities, though I will probably bunch donations and only itemize every other year. One tool I found that has been great is a charitable donations valuation software program called Charity Deductions. It costs $25/year but I save over $200 every year. It has a huge database that gives you the maximum value (recognized by the IRS) for each item you donate.
The new tax code does NOT raise taxes on the working class and poor people. As I write this it is April 2019, the TaxAide office I volunteer in does taxes for just such people. Every time I have an opportunity to compare last year’s taxes with this year’s, it has been lower this year.
Raising the standard deduction to $24,000 for a married couple (vs. 12,700 +4100 +4100 before), exempts more income from tax, how is this not helping regular people? The numbers are about half for single taxpayers.
The former 15% tax bracket is now 12% and you stay within that bracket until approximately $100,000 income for a married couple (or half that for single), how is this not helping regular people? I feel someone is spreading lies and misinformation about the tax code.
An observation about giving to charity: so many people have no idea how the tax code works, they give charitably or not without knowing how it will affect their taxes… if it were only motivated by tax savings, nobody at all would give unless they knew they could itemize. But they give because it’s a good deed.
The world is a better place than you give it credit for.
I think it is disingenuous to say the purpose of the bill was to make up for the decrease paid by the rich and corporations. Like with the Regan tax cuts (under which the “rich” paid more at 33% than they did at 90%, because of the massive reduction in qualified deductions), cutting one of the highest corporate tax rates in the world was a move intended to stimulate growth and allow our corporations (mostly owned by the Public, don’t you forget) to be more competitive in a global market. I don’t know why the bill was passed; one reason put forth was to simplify tax prep (last year my prep was more simple, but I paid $4000 more in taxes…) But on-topic – most people give because they want to; however, almost everyone with an opinion misses the point: Before, if I wanted to give $1000 to a worthy cause I’d write a check for $1250, because I’d get the $250 back at the end of the year. Now I write a check for $1000. Congressmen knew this when they voted for the (awful) bill. House values in the $400,000 to $1,000,000 range dropped 10% because buyers still wanted a bigger and better house (that is why they were “trading up”), but couldn’t afford to pay the asking prices any more because they had lost the “government participation” afforded by being able to deduct mortgage interest. So they offered less, or quit looking to move up. (The National Realtors Association lobbied hard against this bill, but their efforts fell on deaf ears.) The Republican Party has lost the plot, whether or not the Democratic Party is worse, and how much worse, is up for personal consideration.
Addition: I forgot about this other point, because it was two years ago when the Republicans hit us with a major tax change right before Christmas (in the mad scramble to set up a Donor Advised Fund, I essentially missed Christmas that year). Major charities like the American Cancer Society and United Way didn’t get hit with just the 20% reduction in giving (more or less) caused by this bill. Because most people have a “set” level of giving – and many would be unlikely to reduce the amount they gave to their church (or other religious affiliated charity) – other charities were set to take the brunt of the cutbacks in personal giving. Before this bill passed, I talked to one of the top people at United Way in Washington, DC – he said that although the number of people who deducted between $12,000 and $24,000 on their tax return was less than 20% of filers, they account(ed) for 35% of charitable giving (at least to that organization). Two years down the road I guess there should be some hard data as to how hard this misguided bill hit “non-church” charities… But two years down the road, the Republicans hit us hard again, changing the rules in place for Inherited IRAs, essentially cheating heirs of people with retirement plans in place started two or three decades ago. But if a rich person dies I guess the government views their assets as “excess funds” at that point – and the government needs them more than the (rightful) heirs, right?