Tax Incentives for Charitable Contributions and TCJA

Given the doubling of the standard deduction under Tax Cuts and Jobs Act (TCJA), there will be less opportunity for many people to derive tax benefits from their charitable intent. For a single person who would normally have $8,000 in itemized deductions including their charitable contributions, for instance, under prior tax law, the new standard deduction of $12,000 will leave their taxable income calculation unaffected whether they donate to charity or not.

Tax practitioners are recommending methods such as “stacking” contributions to derive benefits and make to maximize total tax benefits between the standard deductions and potentially itemizing over the span of multiple years. For instance, a client with substantial cash flow who donates $5,000/year to their favorite charity may be inclined to make three years’ worth of donations in 2018, given they have no other deductions to itemize, to get the higher deduction and then still the higher standard deduction for the following two years.

While methods like these are good tax planning, charities could be at a loss if the mere perception of donors deriving tax benefits is gone. To combat this, states are launching their own tax incentives to donors for their state income tax returns. For instance, Vermont is allowing a credit of 5% of up to $20,000 in donations, to be taken dollar-for-dollar against state tax liability. Slightly incentivizing charitable giving should be a great help to both charities and taxpayer-donors.

By Alexander Dixon, Davis & Hodgdon Associates CPAs