I had coffee with a friend recently. As we chatted about our families and our jobs, she casually said to me, “Has this new tax law been bad for you at work? I know charitable contributions aren’t tax-deductible anymore.”
I gave a big sigh, but not because of any opinion I have about the new tax law. I gave a big sigh because this question was two big misconceptions rolled into one. And now, more than a year after the passage of the Tax Cuts and Jobs Act of 2017, it’s finally time for Americans to begin filing their first tax returns under the new law. That makes this the perfect time to set the record straight about the impact of tax reform on charitable giving.
My friend’s first mistake was this: charitable gifts ARE still tax deductible! I discussed this in detail in our Legacy Circle webinar in September, so that’s a good resource on this topic. In a nutshell, the tax deductibility of charitable gifts is not what changed under the new law.
Let me break it down.
Paying taxes is basically all about lowering your taxable income. Every year, when you do your taxes, you calculate your total deductions. You can do this in one of two ways: by “itemizing” your deductions, or by taking the standard deduction. “Itemizing” your deductions means that you add up all of the tax deductions you’re entitled to for the year—this includes your charitable giving, but also things like property taxes and IRA contributions—and subtract that number from your total taxable income. As a result, your taxable income is lower, and you’ll pay less in taxes.
The standard deduction, on the other hand, is a deduction that is available to every taxpayer. So, when you do your taxes, you’ll add up your total deductions for the year and compare that amount to the standard deduction amount. Then, all you have to do is choose the option that saves you the most money. This has not changed.
So, take the 2018 tax year as an example. Because of the new tax law, the standard deduction is $12,000 for single filers. So, let’s say that you’re a single taxpayer. You add up all of your deductions, and the total amount comes to $18,000. Should you itemize your deductions, or take the standard deduction?
In that case, you should itemize. That’s because your total itemized deductions of $18,000 are more than the standard deduction of $12,000. If you itemize, you’ll get to take $6,000 more off of your taxable income than you would if you just took the standard deduction. And, more deductions means you pay less in taxes.
Now, let’s say you’re a single taxpayer and your deductions add up to just $8,000. Should you itemize your deductions, or take the standard deduction?
In this case, you should take the standard deduction. If you itemize, you’ll only get to lower your taxable income by $8,000. But, with the standard deduction, the government is giving you another option to lower your taxable income by $12,000. If you take the standard deduction, you’ll be lowering your taxable income by another $4,000—and again, that means you’ll pay less in taxes.
A few things have changed, though. Most notably, the standard deduction amount has increased, from $6,350 for a single filer in 2017 to $12,000 for that same filer today. Many people who itemized their deductions in 2017 will end up paying less in taxes by taking the standard deduction this time around, and that is going to seem very different. There have also been changes to the types of things that can be deducted, in addition to new limitations placed on other deductions. But, at the end of the day, your charitable deduction is still available to help save you money on your taxes if you need it.
My friend’s second mistake was this: she seems to think that our dedicated sponsors support Plan because they get a tax deduction for doing so—and nothing could be further from the truth!
One of the best parts of being the Director of Planned Giving here at Plan International USA is that I get to meet and speak with our sponsors every day. I get to hear inspiring stories like the ones we’ve featured on our website about why people like you have chosen to partner with Plan to change the lives of children around the world. You give because you believe in being part of something bigger than yourself. You give because you know that we can change lives when we work together toward a common goal. You give because you care.
So I told my friend no. No, the new tax law hasn’t been “bad” for me at work. We’ve talked about it, we’ve responded to it, and we’ve helped people find opportunities to maximize their giving under the new law. But it hasn’t been “bad,” because it hasn’t stopped our donors from doing good in the world. And that’s what matters the most.