Don’t Give Up On Your Charitable Donations: They Survive and Thrive Under The New Tax Cuts and Jobs Act
Unfortunately, under the new Tax Cuts and Jobs Act (TCJA), as predicted by Howard Gleckman of Forbes, “The share of middle-income households claiming the charitable deduction will fall by two-thirds, from about 17 percent to just 5.5 percent.” This is attributed mainly to new restrictions on Schedule A deductions. Coupled with the nearly doubled standard deduction rate, this has pushed many Americans away from itemizing their deductions and, in turn, from claiming charitable deductions.
For this month’s article, we’re here to tell you that claiming charitable deductions can still be very viable. There are a few strategies that can get you above the newly increased standard deduction rate, all the while keeping your annual charitable donations to your community viable for your finances.
TCJA Boosts for Charitable Donations
As aforementioned, the TCJA did greatly restrict the number of deductions you can claim under Schedule A. This has pushed many middle-income Americans away from itemizing their deductions because the higher standard deduction rate is harder to surpass by itemizing deductions.
For example, the TCJA has capped the amount of state and local taxes (SALT) that are deductible to $10,000, which causes problems for high-wealth taxpayers and taxpayers in high-tax states such as California and New York. On top of this, the deductibility of mortgage interest rates has been capped to only the first $750,000 of debt for all mortgages taken out after December 14th, 2017. For instance, with median home values in Boulder now at $720,500 — up 6.1% last year and expected to rise another 4% next year — a new generation of homeowners could fall victim to this code change.
On a positive note, the the TCJA has boosted deductions for charitable contributions by raising the limit that can be contributed in one year. The limit has risen from 50% of adjusted gross income (AGI) to 60% of AGI. Boosting charitable donations is now an excellent option for the taxpayer that loses valuable Schedule A deductions, such as SALT and mortgage interest, to, once again, surpass standard deduction rate and continue itemizing. All the while, maintaining charitable donations to their community.
How To Make The Most of Your Charitable Contributions Under the TCJA
For many middle-income families, while the idea of boosting their charitable donations may sound ideal, it may not be entirely financially feasible. There are a couple of tax-strategic avenues that allow the taxpayer to maintain similar monetary contributions to charities while still increasing deductions.
Bunching is a very simple but extremely effective solution to increase deductions. For instance, if you make a $1,000 donation to the Boys & Girls Club every year, but that still doesn’t put you over the standard deduction rate, you can skip a year and instead donate $2,000 the next year. You can also schedule to have this bunching year align with other payments, like property taxes, pushing your deductions past the standard limit and ultimately saving on your taxes.
Pros: If donations are aligned with other large payments (property tax, mortgage) you can make the most of your itemized deduction that year.
Cons: Charities could suffer from inconsistent donations
Donor-Advised Funds work similarly to bunching, but can relinquish the guilt of only donating to your favorite charity bi-yearly. If you donate $1,000 to your church every year and don’t want to stop annual donations, you can put a large sum of future donations in a Donor-Advised Fund. For example, you can place $5,000 into the fund and schedule your annual $1,000 donation to be given straight to your church from the fund every year. Putting $5,000 in the donor-advised fund, even though it hasn’t yet been received by the charity, allows the $5,000 donation to be immediately deductible. Even better, you maintain full privileges of determining your grant to qualified charities and your assets can grow while in the fund.
Most large financial services companies like Fidelity and Charles Schwab will have options to set up donor-advised funds. There are, however, some fees associated with using these services. For instance, if you put $10,000 into Fidelity Charitable, Fidelity’s donor fund, the annual fees would be roughly $127. If you’re willing to absorb those fees the Donor-Advised route may be the most flexible solution, not only to donate your money, but also to gain the best deduction possible.
Pros: Money in fund is instantly deductible, assets in fund can grow, you maintain full privileges over charitable contributions, you can continue normal annual donations
Cons: Funds often come with annual fees
Colorado Charitable Deduction
Even if you’re not going to itemize your deductions federally doesn’t mean you should give up on charitable contributions. In Colorado, even if you’re not itemizing federally for the tax year, you can still get a deduction from the state if your charitable contributions are greater than $500. So, on years you’re not bunching donations or claiming a donor-advised fund deduction, you can still capitalize on state level charitable deductions.
Colorado Child Care Contribution Tax Credit
For Colorado residents considering raising their charitable contribution, they should also consider the Colorado Child Care Contribution Tax Credit (CCCCTC) to get even more value out of your donation. The CCCCTC offers a tax credit of 50% for a qualifying monetary contribution to promote child care in Colorado up to $100,000. This means a contribution of $5,000 to a non-profit organization in Colorado that promotes child care, such as the Boys & Girls Clubs of Larimer County, will be offset by a $2,500 tax credit against your Colorado income taxes. Your contribution is also eligible to be claimed in full as a charitable deduction on your Schedule A federal tax returns in addition to the state returns for Colorado. Depending on your federal marginal tax bracket, as well as the impact of your itemized deduction situation, the amount of positive tax impact could be as high as 90% of the contribution. This means your theoretical $5,000 contribution would be offset with $4,500, by the federal government and Colorado state, in tax credit and deductions.
Taxpayers Eligible for the Credit
- Colorado Residents
- Nonresident individuals that file Colorado tax returns
- C corporations
Examples of Eligible Organizations
- Boys & Girls Club of Larimer County (or any Boys & Girls Club in Colorado)
- Realities For Children
- Teaching Tree
- Mile High United Way
For more information about CCCCTC qualifying contributions and a list of other qualified charities visit the Colorado Department of Revenue website.
Pros: You can donate more than you would normally because your getting at least 50% of your contribution back and you don’t have to itemize federally to claim Colorado state charitable deductions and tax credit
Cons: Your favorite charity may not qualify for the credit
These options we’ve discussed above are great solutions to not only continue contributing to your favorite charities and community, but also to benefit under the new Tax Cuts and Jobs Act. With the deductible amount of charitable donations raised from 50% of adjusted gross income to 60% its more lucrative to donate then every before. Using donor-advised funds or bunching, in tandem with the Colorado Child Care Contribution Tax Credit, present incredibly viable opportunities to take make the most of your contributions. Some of these strategies might suit your needs better than others so it’s best to thoroughly review your options. If you have any additional questions, please call us to schedule a meeting and we’ll be happy to discuss how these changes may impact you or your organization.