One tax area that your clients might want to prepare for before the end of the year is the way they approach charitable contributions.
The sweeping tax reform bill that was signed into law at the end of 2017 has many taxpayers wondering exactly what will change for them. One area that your clients might want to prepare for is the way they approach charitable contributions. While it still exists, the ever-popular charitable contribution tax deduction will likely not have as much of an impact on taxes as it has in years past.
Americans give millions of dollars to various charities each year, such as non-profit groups, local schools, churches, and more. Traditionally, they have been rewarded for their financial generosity because contributions to charities have been tax deductible. Many people worried that the popular deduction would not survive the major changes included in the new tax law. While many other deductions got eliminated, charitable contribution deductions remained.
While the good news is that tax deductions for charities are still around, changes to other areas of the tax laws will likely make it more expensive for people to contribute to charities. Your clients have probably heard a lot of misinformation regarding charitable contributions, so now is an excellent time to educate them on what the new tax law really means for them.
Every year as you prepare their income taxes, you and your clients look at the standard deduction versus the itemized deduction to see which one is higher and most advantageous for them. Charitable contributions are included as an itemized deduction and help push total deductions up above the old standard deduction. Taxpayers could feel good about being generous while reducing their tax obligation, encouraging more donations to worthy charities.
With the new tax law, however, the standard deduction increased dramatically. Your clients may be excited to learn that the new standard deduction is $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. Although the IRS notes that only around 30% of American taxpayers choose to itemize, projections forecast that in the years ahead, that will fall to around 10%. This means more Americans than ever will not claim charitable contributions on their income taxes.
If your clients have enjoyed the tax breaks that come from charitable contributions in the past, they may no longer see those deductions reflected in their taxes. In other words, they may still donate to charities, but they won’t be able to deduct them as they used to if they now take the standard deduction. It remains to be seen whether Americans will be less generous if there is no tax incentive for charitable contributions.
You can help your clients estimate whether they will continue to itemize deductions or choose the new standard deduction. If they are close to the cutoff, they may decide not to contribute or contribute less to charities because they no longer see tax savings.
One way that your clients can still see some tax benefits from their charitable contributions is to follow a skip-year plan, also known as bunching. With this method, the taxpayers make charitable contributions to a donor-advised fund. Then, every other year they make double the donations for the greater deduction. This strategy allows taxpayers to still contribute to charity and get some tax breaks.
For example, this year a taxpayer could make no direct donations and take the standard deduction on their income tax. They can put that money into the donor-advised fund. Next year, the taxpayer could donate two years’ worth of charitable contributions, then itemize their deductions, which includes the large charitable contributions. This would repeat year after year, alternating between standard and itemized donations.
A skip-year plan is considered one of the best ways to utilize the new standard deduction and maximize tax savings. However, your clients will certainly need your expertise in tax preparation to guide them in executing this plan to maximize the tax benefits of charitable contributions.
Interested in more ways you can help clients with tax planning? Check out Tax Planning: The Good, the Bad, and the Ugly.