Charitable Giving under the Tax Law Changes
The sweeping tax laws changes from year ago have a great effect on charitable giving. These are likely to be even more profound in 2019 as taxpayers better understand the law. The new law increases the amount a taxpayer can deduct from 50% of adjusted gross income (AGI) to 60% of AGI. This not a significant change for most of the tax returns I prepare. The big change is the increased standard deduction and the limitation on the state and local tax deductions. The limitation of only $10K of state and local taxes will dramatically reduce itemized deductions for many taxpayers. This will reduce itemized deductions for some returns I prepare by $30,000.
These reduced itemization’s will often force taxpayers into the new standardized deductions. For 2018, the standard deductions are roughly doubled from 2017. Now being subject to standard deductions a taxpayer will not directly receive a tax benefit from charitable giving. Many more folks will not fully understand the change until they complete their 2018 returns next year. As a result of the law changes, I suspect some charities are nervous about the change and supercharging their year end fundraising.
Taxpayers can take charge of this law change by bunching deductions every other year . This process helps taxpayers to exceed the standard deduction amount in alternating years. The key is that Taxpayers must actually be give substantial amounts to the charities gain the deduction. One way is for folks to give to a Donor Advised Fund (DAF). These funds distribute money to the charities of one’s choice in future years while capture a big deduction the first year. Fidelity, Vanguard and TD Ameritrade and others offer DAFs.
New Tax Forms
In addition to the new law, the administration mandated new forms to respond to the postcard return campaign pledge. As many of the new forms are still in draft, my comments are based upon what is known now. The IRS eliminated the 1040A and 1040EZ forms. All taxpayers will use the Form 1040. The IRS shrank the 1040 to approximately a double-sided half sheet of paper. There is no place for mailing address on the “postcard.” There are many fewer lines on the 1040. The information removed has been put on 6 (yes, six) new forms or schedules. Most taxpayers will need two or more of these additional new schedules to complete their 2018 returns. See the IRS new schedule list.
The postcard return has not actually reduced the amount of paper but rather increased it. Ironically, the majority of taxpayers file electronically so the actual design of the tax forms is a moot point. There are two main exceptions are the printed out the tax returns. First, the paper copy preparation software provides taxpayers a as record of the return. Second, taxpayer must still file amended returns on paper. This change makes more work for the underfunded IRS. It also creates more work for preparers and software companies which means more expensive tax returns for the average taxpayer.