Last year set records for charitable giving, with donors across the United States contributing some $400 billion to nonprofit organizations.
But changes in the federal income tax code, which take effect for the 2018 tax year, might mean itemizing deductions – including charitable deductions – no longer makes sense.
“While we can’t say what will happen with end-of-year donations … Goodwill knows that tax incentives are one of the many reasons why people donate to their favorite charities,” says Karl L. Houston, senior director of marketing and community relations with Goodwill Industries of Middle Tennessee.
“Charitable giving also feels good when you do it; helping others is its (own) reward. Moreover, because of that, we expect our donors will continue to support Goodwill’s mission as they always have by donating their gently used clothing and home goods during the end of the year,” he adds.
He says his organization probably won’t see the effect of the change in the tax law until next April, after people have filed their taxes. Goodwill does very little fundraising for monetary contributions, Houston adds.
There has been a deduction for charitable giving ever since the first federal income tax legislation in 1913, explains Beverly I. Moran, professor of law and professor of sociology at Vanderbilt University Law School.
But people give to charities for a number of reasons, she adds, citing an article by Candace Raymond, an economics professor at Pomona College.
Those reasons include awareness of need, solicitation, values such as altruism, the efficacy of the gift and psychological benefits of giving. The Raymond article was based on a 2011 review of the literature by other scholars.
Higher-income individuals have tended to use the charitable deduction. Moran points to an October 2017 Washington Post analysis that found about 30 percent of taxpayers itemized but that share could drop to 5 percent with an increase in the standard deduction. Those who continued to itemize would most likely be paying a great deal of mortgage interest or making large charitable contributions.
Regarding charitable giving itself, Houston says Goodwill is experiencing more than a 4 percent increase in donations compared to last year and expects Tennesseans will continue to donate their gently used items.
“The change in tax law has had no any dramatic effect on donations at this point,” he continues.
John D. Houston, a Chattanooga CPA with his own single-proprietor accounting firm that concentrates on tax work, says, “People who give regularly are going to do what they’ve done” in the past, and that he doesn’t believe this tax year’s decrease in the top tax rate will change people’s willingness to give to charities.
“The elephant in the room,” he acknowledges, “is the increase in the standard deduction and the elimination of some individual itemized deductions,” changes made by the 2017 Tax Cut and Jobs Act.
For a single taxpayer, total itemized deductions for 2018 will have to exceed the new $12,000 standard deduction for the taxpayer to benefit from itemizing. The 2018 standard deduction for a married couple filing jointly is $24,000. Last year, the standard deductions were about half this year’s amount.
Some charities could be hit harder than others by a higher standard deduction, including nonprofits that depend on smaller donations by middle-class families. Last year, Moran says, many business publications advised taxpayers to increase charitable contributions for the 2017 tax year so they could take advantage of the lower standard deduction.
Accountant Houston points out that of his roughly 125 taxpayer clients – both privately held businesses and individuals – perhaps 5 percent to 10 percent increased their charitable contributions at the end of 2017 or say they plan to double up on charitable contributions this year so they would be giving enough to exceed the new, higher standard deduction.
For the 2018 tax year, he notes, taxpayers can still itemize and take deductions for charitable gifts, mortgage interest, state and local taxes (with the deduction capped at $10,000) and medical expenses over 7.5 percent of adjusted gross income.
“That’s really the four (deductions) you’ve got left,” he says, adding, the rules for what qualifies as a charitable gift remain about the same.
Many older couples filing jointly “don’t have a mortgage interest deduction if their house is paid for,” he says. “They’re going to have to have a lot of charitable contributions to exceed” the $24,000 standard deduction.
“We’re going to see (that) a lot of middle- to upper-middle-income taxpayers that are generous with their charitable contributions” may find it worthwhile to double up on contributions to exceed the standard deduction and be able to itemize, John Houston says.
For example, a taxpayer could double up by paying both his 2018 and 2019 church pledges at the end of 2018, so he could get a larger deduction for the 2018 tax year. But the church would receive the money all at once in 2018 and receive nothing in 2019.
While some may be able to afford to double up on donations to take advantage of a tax deduction every other year (or even less frequently), the CPA points out a greater number of people probably will claim the standard deduction under the 2018 tax law, especially if they have lower incomes and smaller charitable contributions.
Charities may also be aided by another tax-advantaged way to donate, says Ellen Lehman, president of the Community Foundation of Middle Tennessee.
Persons 70.5 years of age and who must take the minimum distribution from their Individual Retirement Account can choose to send that distribution directly to a charity and not recognize that amount as income.
It’s an underutilized way to deal with the payment of taxes, she says.
“Tennesseans have a tradition of philanthropy and a spirit of generosity,” Goodwill’s Houston says, “that will always prompt them to donate to help the lives of people in their communities.”