Under the new tax reform law – the Tax Cuts and Jobs Act (TCJA) – many itemized deductions are being eliminated or curbed, beginning in 2018. But the deduction for charitable contributions was spared.
In fact, the new law even includes a slight improvement in the rules. For clients who will still itemize in 2018, the annual deduction limit for gifts to public charities and private foundations is raised from 50% of adjusted gross income (AGI) to 60% of AGI.
At the same time, however, the TCJA wipes out the current deduction for 80% of the cost of contributing to college booster clubs for the right to buy preferred seating at athletic events. As for charitable deductions claimed on 2017 returns filed this year, the prior rules remain in place.
Here are five common situations when clients may benefit tax-wise from their generosity. Advise them accordingly:
1. Monetary contributions: If you donate cash or make a cash-equivalent contribution to a qualified charitable organization, you can generally deduct the full amount of the contribution, subject to the annual limit of 50% of AGI (increasing to 60% in 2018). Any excess may be carried over for up to five years.
However, the tax law imposes tough recordkeeping rules for monetary contributions. For a cash donation of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity. Usually, the charity is perfectly willing to comply with this requirement.
2. Gifts of property: In addition, you may donate certain property you own, such as securities or artwork, to a charity. Best of all, if the property would have qualified for a long-term capital gain if you had you sold it instead of donating it -- in other words, you’ve held it longer than a year -- you may deduct its full fair market value (FMV) on the date of the donation. Therefore, the appreciation in value while you owned the property remains untaxed…forever.
Note that gifts of property must be used to further the charity’s tax-exempt purpose. For example, if you give a painting a museum, it must be prominently displayed where the public can see it.
Similarly, if you donate clothing to a goodwill organization, it must be made available to potential recipients. Also, the current annual deduction for gifts of property is limited to 30% of AGI. Finally, an independent appraisal is required for donated property valued above $5,000.
3. Quid pro quo contributions: If you make a donation and receive a benefit in return, return, your actual deduction may be reduced. For such a “quid pro quo contribution” for goods or services exceeding $75, the charity must provide a good faith estimate of the goods and services received and the amount exceeding the benefit’s value. You may only deduct the difference.
Suppose that you and your spouse attend a fundraising dinner costing $250 a head. If the charity values the meal at $100 per person, your deduction is limited to $300. But most low-cost items and nominal gifts, like coffee mugs or pens featuring the charity’s logo, don’t have to be discounted.
4. Volunteer services: Although you can’t deduct the value of the time you spend helping a charity, you can still write off your charity-related out-of-pocket expenses. This includes items like supplies, travel and lodging at a convention where you’re a delegate. However, travel expenses can’t be deducted if the trip is merely a disguised vacation.
If you need special clothing for charitable activities – for example, a Boy Scout or Girl Scout uniform if you’re a troop leader – you can deduct the cost. Icing on the cake: The costs of maintaining and cleaning the clothing is deductible as a miscellaneous expense on your 2017 return (subject to a 2-%-of-AGI floor). Note: The deduction for miscellaneous expenses is repealed by the TCJA, beginning in 2018.
5. Donor-advised funds: As the name implies, you have more control over a donor-advised fund than you do with regular contributions to charity. Typically, you contribute to a fund managed by a reputable outfit. A minimum gift of at least $5,000 is usually required.
The fund may also charge fees, based on a percentage of the deposit (e.g., 0.5%-1%), to cover its administrative costs and other expenses. Notably, you select the qualified charitable organizations to benefit from your gift.
Grant recommendations are reviewed by staff members who verify that the charity is eligible to receive tax-exempt contributions. Once the grant is approved, a check is cut to the charity, indicating that the donation was made upon the donor’s recommendation. (Alternatively, gifts can be made anonymously.) Although Congress threatened to crack down on this tax break, it remains intact.
This may be the last year many of your clients claim a charitable deduction due to the increase in the standard deduction and cutbacks in itemized deductions under the new tax law. Make sure that they maximize the available tax benefits on their 2017 return.
This article is part of a series titled Vintage 2017 Tax Deductions, which focuses on the key deductions your clients may be able to claim under the new tax law.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...