Leading up to the new Tax Cuts and Jobs Act of 2017 being passed, the greatest area of focus and concern centered on whether or not charitable gifts would continue to qualify as a tax-deductible benefit. The good news is that not only was tax deductibility retained for charitable giving, the overall amount that can be deducted on an annual basis increased from 50 percent of one’s Adjusted Gross Income (AGI) to 60 percent of AGI. Overall, this is a 20 percent increase on the amount of giving that can be considered tax-deductible in any given year. Furthermore, the five-year-carry-over benefit was retained, meaning in any year if cash gifts exceed 60 percent of AGI, the overage can be claimed as a tax deduction in the following year’s tax return, and any continued excess can continue to be carried over and claimed for up to five years.
The IRS understands that it costs money to live and therefore doesn’t expect us to pay tax on every single dollar of income. Accordingly, when tax returns are filed, the IRS provides two choices to claim a portion of income that they won’t require a share of: 1) the standard deduction, or 2) itemized tax-deductible expenses.
When choosing the standard deduction, one claims a fixed amount of income that is excluded from federal income tax. This fixed amount is set by the IRS and varies based on how one chooses to file their tax return (single, head of household, or married filing jointly). A major change enacted with the Tax Cuts and Jobs Act of 2017 was to significantly increase standard deduction amounts – virtually doubling these levels. The table below illustrates the significant changes in standard deduction levels for 2018 tax returns compared with 2017 levels.
Changes in the Standard Deduction: 2018 vs. 2017
|Tax Year||Single||Head of Household||Married Filing Jointly|
The other choice available for taxpayers to consider in excluding a portion of income from being subject to federal income tax is to itemize tax-deductible expenses. Using this option, all qualified tax-deductible expenses are included on a tax return and the grand total becomes the amount of income excluded from federal income tax.
When considering this option, there are three common forms of itemized expenses: 1) charitable gifts, 2) mortgage interest, and 3) state and local taxes. As mentioned previously, the new tax law maintained tax deductibility for charitable giving. In fact, among the three common tax-deductible expenses, this was the only benefit that was expanded (from 50 percent of AGI to 60 percent of AGI).
The other two common forms of tax-deductible expenses – mortgage interest and state and local taxes – each experienced a slight reduction from previous benefit levels. Under the new tax code, mortgage interest on home equity loans can no longer be claimed as a tax-deductible expense. In addition, mortgage interest on home loans that can be claimed as tax deductible is now limited to interest on mortgages of $750,000 or less (down from $1 million that was allowed previously).
Regarding state and local taxes, the new tax code placed a cap on the amount that can be claimed as tax deductible. This new limit that can be claimed for the combination of state and local taxes paid in a given year is $10,000. Although not a common itemized deduction used by many taxpayers, it is worth noting that giving for preferred seating at college/university athletic events are no longer considered tax-deductible expenses in the new tax code. Despite these slight reductions in tax deductibility benefits, many households will continue to qualify as “itemizers” when filing their tax returns.
In conclusion, the Tax Cuts and Jobs Act of 2017 has brought many positive changes that will result in more money being available for households to save, spend, and give. However, the news headlines leading up to the passage of the new tax code have left some with a misperception that these changes have been detrimental toward charitable giving. Quite the contrary. In fact, the new tax code has maintained a positive position for charitable giving as a viable part of one’s household budget and tax-savings strategy. The aspect of the new tax law that is receiving the most attention is the virtual doubling of the standard deduction levels, and how this change might impact one’s desire to give charitably.
“In our experience, we have found that most individuals who choose to give to Bluefield College do so because of their belief in our mission, vision, and strategic direction, with the tax deduction only serving as a fringe benefit of giving,” said Hal Keene, BC’s director of planned giving. “Whether you choose to remain an itemizer or if your personal expenses dictate that taking the standard deduction is more favorable, we want you to know that we value your partnership with our institution, and we are continually grateful for your philanthropic investment in our great mission.”