This is the time of year when you traditionally step up donations to charities. Generally, you can deduct your contributions in the tax year in which they are made, subject to certain limits. But there are additional complications in 2018.
Under the Tax Cuts and Jobs Act (TCJA), the standard deduction is essentially doubled to $12,000 for single filers and $24,000 for joint filers, while certain itemized deductions are reduced or eliminated for 2018 through 2025. As a result, you may not get any tax benefit from your charitable donations if you no longer itemize.
First things first: Figure out if you will be itemizing in 2018. This could affect the level of your gift-giving this year. For instance, you might decide to “bunch” larger gifts in a year they will do you the most tax good—perhaps 2018 or 2019. Also, consider other tax law limits for charitable donations.
For starters, a taxpayer can deduct the full amount of cash or cash-equivalent contributions made to a qualified charitable organization, as long as strict substantiation requirements are met. However, the total annual deduction for these monetary contributions is limited to 60% of your adjusted gross income (AGI). The TCJA increased this figure from 50% of AGI for 2018 through 2025. Any excess may be carried forward for up to five years.
Suppose you donate appreciated property instead of cash to a charity. This is where things get really tricky. Usually, for donations of long-term capital gain property, you can deduct the property’s full fair market value (FMV). This rule applies to property that would have produced a long-term capital gain if you had sold it instead of donating it (i.e., property you have owned for more than one year). There is no tax on the appreciation in value.
If long-term capital gain property is donated to a charity, the deduction is generally limited to 30% of your AGI. If your charitable donations of property exceed the 30%-of-AGI limit for the current year, the excess may be carried forward for up to five years.
Other special rules may come into play. For example, when you donate property to charity, it must be used to further the charity’s tax-exempt mission. Otherwise, your deduction is limited to your basis in the property, regardless of how long you have owned it. In other words, you cannot deduct its FMV even if it qualifies as long-term capital gain property, as discussed above.
In the past, certain itemized deductions—including deductions for charitable contributions—were reduced under the “Pease rule.” However, the Pease rule was officially eliminated by the TCJA in conjunction with the other changes relating to itemized deductions.
Finally, be aware that a charitable donation charged by credit card in December is deductible in 2018, even if you do not actually pay the credit card charge until January!
Last words: As the end of the year fast approaches, look to maximize the tax benefits of charitable donations. If you have any questions regarding your personal situation, do not hesitate to seek professional assistance from your JMF tax professional. Also, to read further, check out the JMF Year-End Tax Planning Letter.
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