The chance to get a deduction for their generosity often motivates charitable givers to become even more generous and write larger checks. But under the Tax Cuts and Jobs Act, far fewer taxpayers will itemize deductions when they file their tax returns for 2018—and beyond—compared with 2017. And that is leading to a lot of hand-wringing among charities.
The new tax law nearly doubles the standard deduction in 2018—to $12,000 for singles and $24,000 for joint filers younger than age 65—while capping or eliminating other deductions. That means it will no longer make sense for as many taxpayers to itemize. The Tax Policy Center estimates that the number of households claiming an itemized deduction for charitable giving will fall from about 37 million to about 16 million in 2018.
Though it’s too soon to know the precise fallout from the new tax law, nonprofits are concerned. The Council on Foundations estimates that the new rules will decrease charitable giving in the U.S. by $16 billion to $24 billion annually (total giving was $390 billion in 2016, according to Giving USA). But there are alternatives that let you take a tax deduction while consistently supporting your favorite groups. And even if tax incentives don’t factor into your philanthropy at all, tweaking your strategy in other ways can mean a bigger impact on causes you care about.
If you are close to the threshold for taking the standard deduction, you may be able to get a tax break for your donations by employing a tactic called bunching. Basically, you make two or more years’ worth of donations in a single year so that—along with your other deductible expenses—you’ll end up with enough deductions to itemize that year. Then you skip donating the next year or two and revert to taking the standard deduction.
Although this tactic will provide a tax break for you, it may not be ideal for the charity. “This model would significantly impact nonprofits, many of which have little in reserves,” says Mirah Horowitz, executive director of Lucky Dog Animal Rescue in Arlington, Va. But a donor-advised fund avoids that problem. Contributing to one allows you to pool your donations in one pot, deduct the entire contribution in the year you make it and then spend time deciding how you want to dole out grants. You can continue to give in “off” years—on a more regular schedule that will benefit the charity, too—while taking the standard deduction.
Donor-advised funds are available through financial-services firms, independent groups such as the National Philanthropic Trust, community foundations and “single-issue charities,” such as hospitals, universities and religious organizations. The funds have become increasingly popular: In 2017, Fidelity Charitable, a donor-advised fund sponsor, reported an 83% increase in new donors over the previous year, while Schwab Charitable saw the number of new accounts opened in the last six months of 2017 jump by 91% compared with the same period in 2016.
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