Considered the most significant tax code overhaul in over three decades, the Tax Cuts and Jobs Act was passed by Congress on Dec. 20, 2017 and signed into law by President Trump on Dec. 22, 2017. It includes provisions affecting both individuals and businesses, and while it simplifies taxes for some taxpayers, it has created new complexity for others.
Standard Deduction Increases
It has been estimated that nearly 90 percent of individual taxpayers will now utilize the increased deduction capabilities of the standard deduction. Not including additional standard deduction amounts for the blind or elderly, the Tax Cuts and Jobs Act increased the standard deduction for a couple electing to file “married filing joint” from $12,700 in 2017 to $24,000 in 2018. Additionally, the standard deduction for a single taxpayer increased from $6,350 in 2017 to $12,000 in 2018. The increase in the standard deduction amounts alone will likely generate enough tax savings to switch many individual taxpayers from claiming itemized deductions, and the law’s limitation (or complete elimination) of certain itemized deductions enhances that likelihood.
Impact on Charitable Contributions
The most commonly used itemized deductions include:
With the standard deduction almost double the amount of prior years, the decrease in taxpayers claiming itemized deductions is expected to have an impact on charitable giving, primarily because the incentive to make a charitable contribution and receive a tax deduction will be gone for many taxpayers. However, in many cases, it may not matter. Individuals should give because they are passionate about the causes that charitable organizations support, not just because they will save money on income taxes. But, in those cases where the deduction does matter, better planning for those who wish to donate will make it much easier to realize a tax benefit.
For example, let’s look at how these new changes have affected the agricultural community when gifting commodities. Cash basis producers can still make contributions of raised commodities directly to a charitable organization. The fair market value of the gifted commodity is excluded from taxable income of the donor, resulting in the potential for significant federal, state and self-employment tax savings. This is true even though no charitable deduction is allowed, as the tax basis of the commodity contributed is zero.
How does this strategy work to provide the maximum tax benefit? To achieve the desired results, it is very important that the following rules are followed:
Remember, if the above rules are not followed, the IRS may treat the commodity donation first as a grain sale by the farmer, and then a subsequent cash contribution to the charitable organization, which is not the best result for the farmer.
The example above is just one of many that need to be considered when planning gifts to charitable organizations. To maximize your benefits and reduce the risk of unintended consequences, consult with your tax professional to discuss this or other strategies for charitable giving in the new era of taxation under the Tax Cuts and Jobs Act.
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