A long standing practice under our tax laws has been to allow taxpayers to take a deduction for charitable contributions they make during the tax year. While the Tax Cuts and Jobs Act (TCJA) retains the tax deduction for charitable contributions, it makes other changes that will significantly reduce the number of people able to claim the deduction. As a result, it is expected that starting in 2018, far fewer people will give to charities than have given in the past under prior tax rules.
You can only deduct charitable contributions if you itemize your personal deductions on your tax return. Personal deductions include items like property tax, mortgage interest, medical expenses, and charitable contributions. If all your personal deductions exceed the standard deduction amount set by the IRS, then you are better off itemizing to get the higher itemized deduction amount.
The TCJA almost doubles the amount of the standard deduction. Under prior law, the standard deduction was $6,350 for singles and $12,700 for married couples filing jointly. The TCJA increased the standard deduction amounts to $12,000 for singles and $24,000 for married couples filing jointly. In addition, some personal deductions were eliminated or changed under the new tax law – for example, there is now a $10,000 cap on state and local tax deductions.
This means that unless you are one of the few people who still itemizes instead of taking the new higher standard deduction, you will not be able to claim a deduction for any charitable contributions you make. It is estimated that fewer than 5% of all taxpayers will itemize compared to the 20% or so who itemized in recent years. Charities and nonprofits are very concerned that most taxpayers will no longer have a tax incentive to make charitable donations.
There has always been a cap on how much a person could deduct for charitable contributions. Under prior law, that cap was no more than 50% of the taxpayer’s adjusted gross income (AGI). The 50% AGI limit applied to cash contributions to public charities; different rules and limits applied to non-cash gifts.
Under the TCJA, the AGI limit for cash contributions to charities increased from 50% to 60%. This will mostly affect only very wealthy donors interested in giving away a significant percentage of their income to charity. They will now be able to give 10% more of their AGI than they had been able to give in the past.
The TCJA increased the estate tax exemption for individuals to $11.2 million from $5.4 million. This means most taxpayers will be able to give away or bequeath their entire estates without having to pay any estate tax. This effectively eliminates any tax incentive for making charitable bequests – something that was mostly used by wealthy people in the past as part of their overall estate planning.
