The tax reform bill, which is expected to be signed by President Donald Trump this week, could change the way some Americans donate to charities, creating a potential situation in which people give more this year before the legislation goes into effect. That's according to Charles Schwab's Schwab Center for Financial Research, which broke down what the change to the tax code will mean to charitable donations.
According to The Charles Schwab Corporation's (SCHW) research arm, roughly 30% of taxpayers in the U.S. itemize their deductions. With the tax reform bill, that is expected to decline to less than 10% of taxpayers who continue to itemize charitable giving. Schwab said that taxpayers who give small amounts to charity and itemize will be affected the most, with the researchers finding that the increased standard deduction will lower the taxes owed by this group more than itemizing would. That will result in these taxpayers forgoing the charitable deduction altogether.
Those that have large annual itemized deductions that include substantial charitable donations will not be affected by the changes because their donations coupled with other deductions will typically be greater than the standard deduction. If the itemized deductions surpass the standard deduction, these taxpayers are likely to continue to itemize, receiving the full tax benefit from their charitable contributions.
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For taxpayers wondering if they should make any moves before the new tax policies become the law of the land, Schwab said that some advisors may suggest an acceleration of charitable giving in 2017, maximizing the amount of deductions for this year. However, the San Francisco-based brokerage believes that charitable giving shouldn't be driven purely by the tax code, but rather by a desire to give back. "Charitable giving is always a worthy goal, so don't let tax legislation change your gifting plans, including gifting before year-end. But don't panic and accelerate giving based solely on tax legislation or a change in tax law," said Hayden Adams, director of tax and financial planning at Schwab Center for Financial Research, in a blog post. "In the end, getting a tax deduction is only a side benefit of charitable giving, and it's better to base your charitable-giving decisions on a full range of factors, including the satisfaction of helping a worthy cause."
If you are still focused on taking some kind of action this year, Adams said that, depending on the situation, it may make sense to increase the amount of giving, but it is important to be sure that any donations are completed before Dec. 31 to make them count for this year. Another way to play tax reform is to give more in 2018 with an eye toward having itemized deductions that are larger than the increased standard deduction. "Let’s say a married couple has $23,500 of itemized expenses, including a $2,000 donation to a qualified charity. If the couple donated an additional $1,000 to that charity, their itemized expenses would surpass the $24,000 standard deduction and make it possible to claim the charitable deduction," Adams wrote.