Deducting charitable donations made in 2018 may pose a problem for many taxpayers this year. That's not because last year's tax overhaul limited these donations -- most are still deductible, just as they were in prior years.
However, the new tax law did increase the standard deduction and limited the deduction for state income and property taxes. That means more filers will find they're better off simply claiming the standard deduction rather than itemizing deductions, including those for charitable donations. Here are the details behind the changes -- and what you can still do to gain tax breaks from your charitable donations.
A new standard deduction
The new tax law increased the standard deduction for single filers to $12,000 from $6,350 and for married filers to $24,000 from $12,700. It also limited the deduction for state income and real estate taxes to $10,000. Because of these changes, some of the 45 million taxpayers who itemized deductions on Schedule A with their 2017 tax return will no longer do so.
But many Americans still plan to make charitable donations. If you're among them and you'd like to get a tax break, consider bunching the donations you planned to make for the next several years and make a single large donation now, before 2018 ends. If the charitable donation is more than your standard deduction, you can claim the entire amount as an itemized deduction on your 2018 tax return.
You can do this is via a donor giving account or under a charitable giving program or donor advised fund. Major financial firms, including Fidelity, Schwab and Vanguard, all offer charitable giving programs that are easy to set up.
Donations of stocks
If you also own stocks or mutual funds with significant gains in a taxable account, here's another valuable tax strategy to consider. You can donate appreciated shares of stock or a mutual fund that you've owned for more than a year instead of writing a check and giving cash.
If your donation of stock is worth $1,000 or more, the tax benefits can really reduce the aftertax cost of the gift. That's because when you donate shares of an investment that has appreciated, you avoid ever reporting the gains as taxable income.
This tax benefit stems from the general rule that when you donate long-term property (owned more than one year), the deduction is equal to the donated property's fair market value. This results in two potential tax benefits: a charitable donation deduction, plus the avoidance of tax on the capital gains.
Donations from an IRA
For anyone who has an IRA and is required to take minimum distributions from it each year, there's a way to make charitable donations that will reduce taxable income dollar-for-dollar, even if you plan to claim the standard deduction and not itemize. Here's how, and who, can do it.
If you're required to takefrom an IRA or retirement plan because you're age 70½ or older, you can use the pretax dollars in your IRA to make direct donations to a nonprofit, religious organization or other qualified charity.
This is called the IRA Qualified Charitable Distribution rule, and it allows IRA owners age 70½ or older who are subject to the required minimum distribution (RMD) rules to use the untaxed money in an IRA to donate to a charity tax-free. But you can't also claim this charitable donation on your tax return (sorry, no double dipping allowed).
Note that the money withdrawn from an IRA and donated to charity stays out of your adjusted gross income only if you make a direct transfer to the charity. It's not tax-free if you withdraw the money first, deposit it into another account and then donate it to the charity.