The new tax codes have just taken effect, but people all over the country are asking themselves: how do charity deductions work under the new tax laws? We’ll try to answer this question in the following sections but be forewarned: things get a bit complicated here and there.
A Charity Calculus?
The IRS allows you to claim a tax deduction whenever you make a charitable donation. Because these are itemized deductions, you’re faced with a choice about whether or not you should claim it. This is because you have to declare one of two filing statuses right up front– either you itemize your return, or you take the standard deduction. It’s one or the other, not both.
So, depending on which amount is greater– the standard deduction or what you’d receive through itemization– you might benefit more by leaving the charitable deduction off your form. In fact, you might have to pay more (or receive less of a refund) if you insist on receiving a deduction in return for your gift. Or you might not. It’s hard to know what to do in advance, but one thing is certain– it’s all contingent upon your understanding of the new IRS guidelines.
The 2018 Tax Code and Its Impact
The Fundraising Effectiveness Project tells us that charitable donations decreased by just over six percent during the first quarter of 2018. This drop is attributable to the Tax Cuts and Jobs Act of 2017 (TCJA). Among other sweeping reforms, the TCJA increases the amount of the standard deduction significantly. But remember as you continue reading– the IRS won’t let you take this huge new standard deduction and itemize your deductions during the same year.
For a married couple that files their taxes jointly in 2019, the standard deduction is exactly $24,000. For people who file as head of household, the standard deduction is $18,000. Lastly, it’s $12,000 for single filers and married filers who file separately. So, think about that for a minute. Unless the total of your itemized deductions is more than the standard deduction for your filing status, claiming the deduction for a charitable donation will do you more financial harm than good.
A Strange New Form of Normal?
Keep in mind the sort of things that qualify as itemized deductions, and you’ll understand the quandary that generous taxpayers find themselves in. Although some restrictions do apply, you’re allowed to itemize deductions for interest on your home loan, state and local taxes, and medical costs that exceed 7.5% of your adjusted gross income. Of course, the deduction for charitable donations qualifies as itemized as well, though there are certain restrictions. For cash, check, or credit card donation, you can only deduct donations that are up to 60% of your adjusted gross income. There are stricter rules if you’re donating stock or property
Now consider the example of a single taxpayer with a total of, say, $9,500 in itemized deductions for the entire year. If this person chose to itemize, they’d have $2,700 more taxable income than if they took the standard deduction. This extra $2,700 comes from subtracting the person’s total itemized deductions from the new $12,200 standard deductions.
The IRS adjusts the standard deduction to keep up with inflation each year, but it’s not like you can change it on a given return. The only choice you actually have is the amount you choose to spend on areas that qualify as itemized deductions. So, it’s possible for the person in the above example to exceed the new standard deduction, but only if they opted to be extremely giving when it came to donating to charities.
Here’s the thing. Or maybe here’s yet another thing– you may or may not be allowed to deduct all the charitable donations you make.
Get This: It Has to Be the Right Kind of Charity
In order to claim your gift as an itemized deduction, the recipient charity has to fall into one of two categories– it must either be a 501(c)3 organization or be included in Section 170(c) of The Internal Revenue Code. Here’s a sampling of the types of charities that qualify under the tax code:
- Some religious organizations qualify, but only those that are included in The Internal Revenue Code 170(c)
- You can deduct for donations to groups such as the Boy/Girl Scouts, The Salvation Army, and the American Red Cross
- Some hospitals and educational institutions qualify, but only if they’re already tax-exempt
- You can deduct donations to private foundations if they disperse the funds to qualifying charities
As you can see, this list marks a shift from how charitable donations worked in the past. To be sure that the organization you’d like to donate to qualifies, make sure it’s designated as a 501(C)(3). You can find additional help on the IRS List of qualifying charities.
How do Charity Deductions Work Under Fair Market Value Rules?
According to IRS regulations, fair market value is the amount an asset might be sold for if neither party is pressured to finish the transaction. This means a situation in which a) the buying party isn’t desperate enough to pay an outrageous price, and b) the selling party isn’t so cash-poor that they would give the asset away for nothing. We mention this because the concept of fair market value plays a significant role in how charitable donations now work.
First, anything you donate has to be worth having. In other words, it must have some amount of fair market value. This concept also applies to situations in which you get something in return for your charitable donation. In short, you must subtract the fair market value of what you got in return from the amount of your original donation. The resulting figure is the amount you can legally deduct.
What’s the Time Frame for Deducting a Charitable Donation?
You are only allowed to claim a deduction for a charitable contribution during the same year that you made it in the first place. Here’s the confusing part– your donation is ‘paid’ the moment you send off your check or right when the amount is put on your charge card. In other words, the transaction is finished before you pay the charge card off or the charity cashes your check.
You have to make the donation on or before December 31 to be able to claim a deduction for that year.
Charitable Donation Miscellany: What You Might Need to Know
To finish up, let’s have a look at how things stand in relation to three other areas of charitable donations.
1. International Charities. The short version is that you can’t deduct anything for donations you make to foreign charities. However, you can claim a deduction if the charitable institution you give a gift to is officially registered in the United States.
2. Tax Deductions and Volunteer Work. Unfortunately, the IRS doesn’t let you claim deductions for the hours you spend doing charity work. However, it does allow you to deduct travel expenses that are directly related to volunteer work.
3. Crowdfunding and Tax Deductions. The best way to handle charitable deductions and crowdfunding sites like IndieGoGo and Kickstarter is to look at the organization for which the money is being raised. None of these sites guarantee that you can deduct a donation you give them. However, you can deduct donations to qualified tax-exempt organizations if they happen to be raising money on one of these sites.
It’s always wise for taxpayers to collect and retain a letter from the charity stating the amount of the donation, date, and that no goods or services were provided in return, as the value received is not deductible. For more information on how charitable deductions work under the TCJA, check out the resources we linked to up above or consult with a qualified tax professional.
About Ivan Popov
Ivan has been counting for the past eight years for small and medium sized businesses helping owners with tax planning, financial covenants, financing and tax optimization.
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