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 is 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”) for those who claim the standard deduction (in addition to those who itemize). Additionally, individuals can deduct up to 100% of their AGI on charitable donations in 2020 and 2021.
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 to $12,200 and $24,400 respectively. 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 amount, 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.