Is your head spinning with numbers and tax formulas? Unsure how to claim your tax-deductible membership on your federal taxes? We asked our accounting department as well as retired CPA and MCA Member Richard Skalitzky for some help navigating the rules governing charitable giving, especially under the new tax reform. Here are the main things you should know.
Tax deductions reduce your tax bill, i.e., how much you owe the government (read: a good thing). Regardless of where you are on the socioeconomic spectrum, you should have something to deduct from your taxes. You can follow one of two routes when claiming these deductions: you can take the standard deduction from your taxable income or you can itemize your deductions on schedule A (Form 1040).
A standard deduction is a fixed dollar amount based on your filing status and age. It is available to everyone (except those who can be claimed as a dependent by another taxpayer, such as a parent) regardless of if you actually incurred any expenses. Earlier this year, Congress passed what’s been simply named the Tax Cuts and Jobs Act. As part of this new tax reform, those who choose to take the standard deduction instead of itemizing will see their deduction increase from $6,350 in 2017 to $12,000 in 2018 for single filers, and from $12,700 to $24,000 for married couples. This, in effect, is a tax cut that allows you to keep more of your earnings and gives you more disposable income when you file your taxes.
Itemizing is more time-consuming, since you must list your deductions on schedule A; it can, however, maximize your deduction when the total itemized deductions exceeds the standard deduction.
For many taxpayers, to accumulate more than $12,000 of itemized deductions for a single taxpayer or more than $24,000 for a married couple may seem insurmountable. But there are many ways to make these deductions add up. For some of the more common deductions, ask yourself:
- Did I have any state and local tax withholdings (i.e., what was taken out of your paycheck)?
- Did I have any large medical or dental expenses, including transportation costs?
- Did I have any large, unreimbursed expenses as an employee?
- Am I a member of any museums? Check their website for information on how much is tax deductible. To crunch the numbers for MCA memberships, visit the Membership page.
- Did I donate clothes, household items, vehicles, or other items to my favorite charity? The fair-market value of the items that you donated may count as a deduction.
- Did I volunteer this past year? Your travel expenses, uniform, or supplies directly related to volunteering may be deductible.
- Did I donate to nonprofit charities?
- Did I move to a new place for a job? The cost of moving may be deductible.
- Did I have any large, uninsured casualty (e.g., fire, flood, wind) or theft losses?
- Am I a homeowner? Real estate taxes, mortgage interest, and mortgage points paid on a loan to buy, build, or improve your main home may all be deductible.
It’s good to note, however, that contributions paid directly to people in need or to political organizations are NOT included in this deduction; only qualified nonprofit organizations are eligible.
A few caveats according to the new law:
Taxpayers will be able to deduct charitable donations up to 60% of their Adjusted Gross Income (AGI) instead of the 50% limitation in place prior to 2018. (This means that, for now, it’s a good incentive for people to give more.)
Medical expenses are limited to the excess over 7.5% of your 2017 and 2018 AGI. In 2019, the limitation reverts back to the previous 10% of AGI.
(You can use this handy tool to find out what your AGI is.)
Other ways to reduce your taxable income:
- Consider “bunching up” your itemized deductions in alternate years. Though this concept is not new, with the higher standard deductions, some taxpayers may benefit by “bunching” their property taxes and charitable giving so that you greatly exceed the standard deduction in one year and then use the standard deduction the next or later year(s);
- If you are over 70 ½ years old, consider giving a qualified charitable distribution of up to $100,000 from your IRA, which automatically counts towards your RMD (Required Minimum Distribution);
- Consider a donor-advised fund that enables you to accumulate smaller gifts into one large amount and take a deduction in the year of the gift. The donor can designate charities as recipients later.
What if I’m not sure what to do?
It’s always a good idea to run the numbers before deciding which route you should take. Given the new deduction rates, however, a standardized deduction may make sense (especially for millennials trying to make ends meet).
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What’s the point of donating?
With the tax reform law, the benefit of tax-deductible donations seems to be advantageous only to those wealthy enough to make large donations, so why donate? Regardless of why you give, donations help nonprofits like the MCA survive. Giving even the smallest amount allows you to take matters into your own hands and support the issues and institutions that you care about the most.
The above summary is provided for informational purposes only. Please consult your tax advisor for any tax planning.
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