How to claim your tax break for charitable donations under the Republican tax act

December is traditionally when people give the most money to charities, but the new tax law means it might make sense for some Americans to ramp up donations even more by year-end, or try different ways of giving.

President Donald Trump heralded the $1.5 trillion tax-overhaul package as a Christmas gift to taxpayers, but charities worry the new law will play the part of the Grinch.

Here’s what the Tax Cuts and Jobs Act — which will apply to taxpayers starting in 2018 — means for charities and the people who give to them.

Give as much as you can this year while you can still deduct under the existing tax rates: With tax rates poised to go down, you’ll get more bang for your buck if you donate as much as you can to charity by 11:59 p.m. on Sunday and claim the deduction on this year’s income. “Because the tax rates are higher this year than they will be next year, the value of your tax incentive is better this year,” said David L. Thompson, vice president of public policy for the National Council of Nonprofits.

Try ‘bunching’ donations from several years into one year: Starting next year, donors should consider giving twice as much to charities in one year, even if that means giving nothing the following year. This will help taxpayers accumulate enough deductions to itemize and write off more than the standard deduction, Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, told MarketWatch.

Charities are bracing for a big drop in donations: The new law nearly doubles the standard deduction — the amount everyone is allowed to subtract from their taxable income — to $12,000 for singles (up from $6,350 for 2017) and $24,000 for married couples who file jointly (up from $12,700). That’s seen as bad news for charities because taxpayers will have less of an incentive to itemize their deductions to reduce their taxable income. And that means people who have donated to charity — whether in part or entirely — as a way to get a tax deduction may be less likely to do so.

“First and foremost, generosity and compassion drives American giving,” said Larry Lieberman, chief operating officer of CharityNavigator, a website where donors can vet nonprofits and make contributions. “In addition to that generosity, the behavior of individuals, and by that I mean the enormous amount of giving on the last two days of the year, indicates that the tax benefits are also considered by some. Charities’ concerns are: What will the effect of changes to the tax law be on the subset of Americans who give because of the tax deductions?”

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Under existing tax law, charitable donations are only deductible when they’re itemized, meaning that you list them separately in your tax return and provide backup documentation. But it only makes sense to itemize if your deductions are more than the standard deduction, and under the new tax law, far fewer people are expected to do so. The number of itemizers is expected to drop from 46 million to 13 million, according to an estimate by the Washington-based Tax Policy Center.

“The vast majority of taxpayers are going to take the standard deduction,” said Thompson. “That means most taxpayers have no incentive to give to charity. That’s a serious concern. We fully expect the doubling of the standard deduction to reduce giving by $13 [billion] to $20 billion a year.”

Don’t miss: Charitable giving forecast to fall by $21 billion a year thanks to Republican tax law

Open or add to a donor-advised fund to get a deduction — even if you don’t itemize: Donor-advised funds, or DAFs, are like personal charitable savings accounts. You can set one up at a community foundation or investment firm. Taxpayers can add assets such as cash or stocks to a DAF whenever they want, then decide later on exactly which charities will receive the money. That makes them a good option if you have money you want to donate, but don’t know which organizations you want to give to yet.

DAFs are also a good way to unload appreciated securities without paying capital-gains taxes. And when taxpayers put their appreciated securities into a DAF, they get to deduct the full current value of those securities from their taxable income that year.

“The stock market is at a record high, and it’s a great opportunity to transfer appreciated stocks, mutual funds and ETFs into a donor-advised fund and get the deduction this year, especially when you’re at a higher tax bracket or a higher tax rate than what it would be next year,” said Larry Pon, a CPA based in Redwood Shores, Calif. “You get the tax deduction now, and you can give away the money later. It’s a real powerful planning tool.”

If cash flow is a concern, charge this year’s donation to a credit card by Dec. 31: Pon has been telling clients who can afford it to accelerate their 2018 and 2019 charitable giving into this year. For clients worried about coming up with the funds on short notice, he has recommended using a credit card to make donations. You can claim the deduction as long as the card is charged by Dec. 31. “We’re not telling people to get into credit-card debt, but if cash flow is a concern, charge it,” Pon said, adding that people should only do this if they know they can come up with the money before the next month’s credit-card bill.

If you’re 70½ or older, consider a qualified charitable distribution: This doesn’t relate specifically to the new tax law, but, after years of uncertainty, the qualified charitable distribution (QCD) was made permanent in late 2015, and Pon is reminding clients that it’s a good option for charitable giving this tax season. The QCD allows people aged 70½ and older to rollover up to $100,000 from retirement accounts to the charity of their choice. Those same taxpayers also must withdraw a “required minimum distribution” from their retirement accounts, and the QCD fulfills that obligation. The money is subtracted from taxable income, which alleviates some tax burden. The QCD also has the added benefit of keeping some taxpayers’ incomes low enough to avoid paying Medicare premiums — the additional fees that higher-income consumers must pay for Medicare coverage.

This option makes the most sense if you’re not itemizing, Pon said.

“If you give at least that much to charity anyway and you don’t need the money, I tell my clients, why not do a QCD?” he said. “If my required minimum distribution is $20,000, I do a $20,000 QCD, and boom, I’ve done my RMD and that money isn’t included in my income.”

People can now give more of their cash to charity — but charities aren’t cheering the change: The tax law increases the maximum taxpayers can donate to charities in cash, raising the limit to 60% of adjusted gross income from the current 50%, according to the National Council on Nonprofits. “That’s a good thing,” said Thompson, but it only applies to the roughly 5% of taxpayers who are expected to itemize under the new law.

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