With the recent changes in the tax law, you may hear your friends saying “well, I can no longer get a tax deduction for my charitable contributions so I guess I’ll stop.” Or maybe you have been thinking the same thing. But we all know that what you hear from friends, read on the internet or see in the news is not always factual.
Under the new tax law, charitable contributions are still allowed as an itemized deduction, just as they have been in the past. Whether you actually get a tax benefit from them is the purpose of this writing. And I must add, you should seek competent advice from your tax professional to discuss your particular circumstances before utilizing any of these strategies. These comments are general in nature and are not intended to address specific, individual situations.
Let’s start with a part of the new tax law that applies to everyone – your “deductions.” On your return, you can deduct the larger of your standard deduction or your itemized deductions. The standard deduction is a “no documentation required” flat amount you can deduct on your return. Itemized deductions require documentation to support the payments you actually did make. For single folks, the standard deduction is now $12,000, and for married folks filing a joint return, it is now $24,000 (and even a bit higher for individuals over a 65).
Yes, what you have heard about your property taxes and California income tax deductions being limited to a total $10,000 deduction is true. However, your mortgage interest expense (with certain limitations) as well as your charitable contributions are still deductible. So, if all of these items (taxes up to the limitation, mortgage interest and charitable contributions) add up to more than your filing status standard deduction, you will still get a tax deduction for the charitable contributions you make.
Let’s change the picture: maybe you no longer have mortgage interest to deduct because you have successfully “burned the mortgage.” Then you would still have your limited $10,000 property and state tax deduction, and if you have charitable contributions (cash and non-cash) which added to that tax deduction and exceed your standard deduction, you are still getting the tax benefit of the contributions you make.
However, let’s change the picture again. Your property and state taxes, mortgage interest and charitable contributions just do not add up to get you over your standard deduction. So any charitable contribution you make does not save you anything in taxes. All is not lost! Are you receiving distributions from an Individual Retirement Account (IRA) which requires you to withdraw a minimum amount each year? If so, by tying your Required Minimum Distribution (RMD) to at least equal your charitable giving, you can make your RMD tax-free. By having your IRA make the contribution directly (as a Qualified Charitable Distribution) to the charitable organization (that is, you do not make it out of your personal funds), the IRA distribution is not considered taxable income to you and the charitable contribution is not a tax deduction for you. But you do not need it as a tax deduction because you are using the standard deduction. No matter, the withdrawal is still considered not taxable to you — that is, it is tax free. As with most things tax related, the rules and limitations surrounding a Qualified Charitable Distribution can be complex. Seek professional counsel and assistance before implementing this strategy.
If you want to learn more about how the new tax law affects charitable giving, contact Jerry Krause at jkrause@ssfllp.com or at 650.358.9000.
