Don’t Stop Giving! How the New Tax Law Affects Charitable Deductions

How the New Tax Law Affects Charitable Deductions

’Tis better to give than to receive — that’s what we’re always told around the holidays. Doing good for others should be its own reward.

But tax deductions are nice, too. For many, this is the time of year for businesses and individuals to give to charitable organizations and get that last-minute deduction from the current year’s taxes. In fact, for many who itemize deductions, the tax incentive has made the difference in whether they donate or not.

However, the 2018 changes to the tax code mean that although those deductions themselves haven’t gone away, you’ll have to cross a tougher threshold to get them. This is because the standard deduction went up considerably.

For individuals filing singly and married couples filing separately, the standard deduction went up to $12,000; for married couples filing jointly, nearly doubled to $24,000; and for heads of household, the new standard deduction is $18,000.

It’s going to be a lot tougher to clear these new, high standard deductions with itemization, so those who have itemized deductions to surpass the standard deduction in the past may no longer bother doing so. A congressional report estimates that only 18 million households will itemize deductions for 2018, which is way down from last year’s 46.5 million.

As a result, here’s the impact these changes could have on charitable giving:

  • Individuals who no longer need to try to snag that extra deduction may take a pass on giving altogether.
  • Some may start what’s called “bunching.” Businesses or individuals who typically give annually might hold off this year, opting instead to make bigger, more substantial donations the next year in order to surpass the standard-deduction threshold. For instance, rather than donating $5,000 per year, they may hold it back and donate $10,000 next year to try to surpass that standard deduction.

While, for sure, giving something is better than giving nothing, we don’t advise bunching. The problem with this strategy is that society’s needs and the work of nonprofits don’t stop when the tax law changes.

Many of these essential organizations rely on donation forecasts in order to develop annual budgets and plan events or service efforts. It’s going to be awfully hard for them to budget when those huge amounts only come every other year and get nothing in the intervening years, or when donors they’ve counted on in the past opt to save their money and reap the rewards of the standard deduction. Some organizations may even go under in such an unpredictable climate, which could have disastrous consequences.

If you’d like help planning your charitable contributions, contact us at Ludmila CPA.