For many people, charitable giving—especially leading up to the holidays—is an annual tradition. However, if you depend on getting tax deductions for any of your gifts, it’s likely time to revisit your charitable giving strategy, suggest Deborah Lauer and Tracy Green, who are both Planning and Life Events Specialists for Wells Fargo Advisors.
The Tax Cuts and Jobs Act (TCJA) introduced several key changes that could impact how much of a tax break—if any—you get for your charitable giving this year. Here’s what you need to know.
Standard and state tax deduction changes
What’s new: The standard federal tax deduction has doubled to $12,000 for individuals and $24,000 for married couples. This is the amount below which itemizing your deductions does not change your taxable income.
Also: There’s now a $10,000 cap on the total of state income and local and property taxes you can itemize and deduct from your taxable income on your federal return.
Impact on your charitable giving strategy: Many taxpayers will now claim the standard deduction rather than itemize deductions on their federal tax forms, says Green, both because the new tax law changes limit or eliminate some of the itemized deductions and the standard deduction is so much higher.
Rethinking your charitable giving strategy: You may want to look for ways to give more in specific years, so you exceed the $12,000/$24,000 standard deduction. Some options:
- Bunch your charitable deductions. If you normally give $5,000 per year to your favorite charities, for example, you could give $15,000 every three years instead.
- Donate long term appreciated stocks. “If you plan to sell the stocks anyway, gifting them to a public charity lets you avoid capital gains taxes and possibly get an itemized charitable deduction for the fair market value of the stock,” explains Green. By donating the stocks directly to the charity or to a donor-advised fund rather than selling the stock and donating the proceeds, you are avoiding the capital gains that may increase your adjusted gross income. Talk to your financial and tax advisors about these scenarios.
- Use a donor-advised fund (DAF). This type of account is simple to set up and incredibly flexible, notes Lauer. A donor-advised fund helps you separate the tax recognition of your donation from when your fund gives grants to qualified charities. You can donate cash or long-term appreciated securities to the fund and possibly receive a charitable deduction for the full amount. Keep in mind charitable itemized deductions are subject to adjusted gross income limits (AGI). (30% AGI limit for stock gifts; 60% AGI limit for cash only gifts instead of the 50% of AGI limit available prior to the new tax law.) You can take your time—over several years, if you like—to plan out how much of the fund you’d like to grant to which charities. Even better, your donation dollars can be invested and have the potential to grow tax-free in the fund while you make those decisions. Additional contributions are also allowed.
- Use your Individual Retirement Account (IRA) distributions. If you’re over age 70½, you can gift up to $100,000 of your IRA per year to public charities. The donated amounts may count toward your required minimum distribution and are excluded from your federal adjusted gross income, so you don’t pay taxes on them. Note: As you do not pay tax on these distributions, you do not receive a charitable income tax deduction.
Changes to the federal estate tax exclusion
What’s new: The exclusion has temporarily been increased—to $11.18 million per individual or $22.36 million for a married couple. This expires at the end of 2025.
Impact on your charitable giving strategy: Individuals or couples whose wills/trusts currently say something like, “I wish to leave to my children an amount up to the estate tax exclusion, and the rest to Charity XYZ” might not have their wishes carried out as they’d like.
Rethinking your charitable giving strategy: “Consider leaving a percentage of your estate to each beneficiary instead of noting the estate tax exclusion,” suggests Lauer. “After all, some people may not intend for their adult children to inherit as much as $11.18 million, or want a greater portion of their estate to go to charity.” Everyone’s planning goals are different so it is important to work with your estate planning attorney to ensure your documents transfer your assets per your wishes. You may even consider more lifetime charitable gifts instead of a charitable bequest if you can take advantage of the income tax deduction.
Annually review your charitable giving program
Review your charitable giving program annually with your tax advisor to monitor its impact on your income tax planning and retirement income goals. “We always advise folks to revisit their estate plans every five years, or whenever there’s been a major tax law change,” notes Lauer. “This year definitely qualifies as one of those ‘review due to tax changes’ years.”