TIP CONTENT PROVIDED BY: CYRUS PURNELL AT FINANCIAL FINESSE
It is said it is better to give than receive. There’s even research that shows giving is psychologically and financially beneficial. For many Americans, giving to charity has made a material difference in terms of reducing their tax liability (approximately 25% of Americans report charitable donations as itemized deductions to their income each year.) Charitable giving is a key component of tax planning for many taxpayers and it is important to make those gifts in time to count for 2018.
Last year’s Tax Cuts and Jobs Act left most charitable deduction rules the same but there have been some additional changes that may make it more difficult to reap the same tax benefits. If you are in the habit of making a lot of donations toward year-end in order to get the tax deduction, keep reading – you may not see as much benefit as in years past.
Is It Deductible?
First, a quick review of the rules of charitable giving. You can count a gift as a charitable tax deduction ONLY if you make that gift to a qualified organization as defined by IRS section 170(c) – most of these are 501(c)(3) organizations.
Outside of that, you may make donations to people or organizations, such as helping a local family in need, but those donations are considered gifts and are not deductible from your taxes. That means those charitable individuals paying off Walmart layaways aren’t likely to see a tax benefit (although I still think it’s really cool!) One of the more common misconceptions is that crowd-sourced giving, like GoFundMe campaigns, are tax deductions, but they are not.
Will Charitable Giving Actually Reduce Your Tax?
Due to the recent tax changes, people who make charitable gifts strictly to lower their income tax burden may need to re-think their strategy. One major change to the tax code is the increase in the standard deduction, which basically doubled for each filing status. This doubling means many Americans who previously itemized deductions will likely use their standard deduction this year because their itemized deductions will not measure up. To determine if you have enough itemized deductions, total them up and compare them to your standard deduction ($12,000 for single, $24,000 for married). You’ll claim whichever one is higher.
One Way to Make it Count for Tax Purposes
If you are falling just short, one idea is to accelerate some charitable contributions for next year into this year to get you over the standard limit. If you are falling well short of reaching your deduction level this year, you could hold off on some end of the year giving to boost your itemized deduction for the following year.
If you have a large amount of funds to donate this year but want to spread out the disbursement of those funds over several years, consider a donor-advised fund. You can make a gift to the donor-advised fund upfront and claim it for the current year and then disperse the gifts over time.
Making Sure Your Gift is Going to a Worthy Cause
Your charitable gift can help an organization achieve its cause, but you want to make sure the organization you are giving to is managing your gift correctly. There are many organizations that offer rosy promises but how can you be sure they are doing what they say? Take some time to investigate the organization’s mission and find out what percentage of donations actually go toward the mission. You may want to tour the operations or even volunteer with the organization to see how your gift is making a difference.
If you are looking for a third party assessment of an organization’s stewardship, online resources like Charity Navigator rate hundreds of organizations on their accountability measures and transparency. If you are considering giving to a smaller or local organization that may not show up on these national search engines, check in with resources like a local community foundation to determine if they have vetted that organization’s efficacy.
The Bottom Line
I have witnessed the ability of a well-run charity to change individual lives and whole communities for the better. Whether you will receive a tax deduction for a gift does not have to be the determining factor in whether to make a gift, but consider these strategies when you do give to maximize the potential tax benefits. Doing so can give you additional assurance that your hard-earned dollars are being effective in helping others, while also leaving you with more money to be generous in the future.