Is the Charitable Deduction Gone?

How changes to the standard deduction amount make itemizing charitable donations pointless for many donors, at least for donations over $300 per year.

The Tax Cuts and Jobs Act that was signed into law in the last days of 2017 did not, contrary to rumors, take away the deduction for gifts made to charities (nonprofits). However, the law's effect is much the same. The reason is the near doubling of the standard deduction that is part of the new law (and affected tax returns for April 2019 and beyond).

The standard deduction is an amount by which taxpayers are allowed to reduce the adjusted gross income (AGI) declared on their income tax return. Under the previously existing law, the standard deduction for 2018 was $6,500 for single taxpayers and married taxpayers filing separately, and $13,000 for married taxpayers filing jointly.

Under the amended law, the standard deduction for single taxpayers and married taxpayers filing separately rose to $12,000, and the standard deduction for married taxpayers filing jointly went up to $24,000.

For many U.S. taxpayers, this increase has meant that it is more financially beneficial to simply take the standard deduction than to itemize deductions on their federal income taxes. Donations to charity are among the deductions that taxpayers can itemize.

Starting in 2020, however, there's a small exception, which Congress included in the Coronavirus Aid Relief and Economic Security Act (CARES Act). Taxpayers who don't itemize may now deduct up to $300 per year in charitable contributions, so long as the contributions were:

Contributions to nonoperating private foundations, support organizations, and donor advised funds (DAFs) don't come within the new deduction.

Of course, not everyone who donates to charity does so in order to gain a tax deduction. But maqny are moved by this incentive, particularly toward the end of the year. Charities in the United States are, naturally, feeling the bite of the changed tax law. The hope is that donors will realize the urgency of their situation and donate regardless of tax deductions. Tax experts also recommend that prospective donors look into the advantages of:

  • Giving appreciated investments, such as stock shares. This allows donors to deduct the investments' full market value (subject to certain limits) without having to pay capital gains tax on the appreciation.
  • Contributing through Individual Retirement Accounts (IRAs). For donors who are age 70½ or older, direct asset contributions of up to $100,000 can be counted toward their required yearly IRA distributions and will not be included in their taxable income.
  • Making huge charitable gifts! At a certain point, your total contributions to qualifying nonprofits could be high enough that itemizing makes sense for you again. Of course, that's not for everyone--though some taxpayers might wish to donate in alternate years, giving little or nothing for one year and making large gifts the next. (Needless to say, charities are worried about the off-year results of this prospect, too.)

If you have other unusual factors at play in your tax situation, it's possible that you will choose not to rely on the standard deduction for other reasons, and would benefit from making charitable deductions as before. See a tax professional for more detailed advice and strategizing.

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