If you choose to itemize your deductions, the math is changing. Under a new tax provision, only charitable contributions that exceed 0.5% of your adjusted gross income (AGI) will be deductible. Any donations below this floor won’t count as a deduction.
Taxpayers in the highest federal income tax bracket (37% tax) now face a cap on charitable deductions. For those in the 37% federal bracket, the tax savings you get from each dollar of itemized deductions (including charitable gifts) is generally capped at 35 cents on the dollar. For example, a $1,000 charitable deduction could reduce your tax by up to $350, instead of $370 under prior rules.
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Fine-tune your giving strategy.
Re-examine your approach to giving and ensure you can make the most of the tax benefits available to you. We can help you tailor your giving approach in light of these new tax changes.
Tax strategies to consider
In light of the new charitable giving rules, you may want to consider the following tax strategies:
1. If you take the standard deduction: Use the new charitable deduction
With the introduction of new charitable giving rules, taxpayers taking the standard deduction should explore strategies to maximize the benefits of the new charitable deduction as it could lower your tax bill. Planning your giving throughout the year — or timing larger donations toward year’s end — can help you take full advantage of the $1,000 (single filers) or $2,000 (married filing jointly) deduction limit.
If you prefer to use a donor-advised fund (DAF), which is a charitable giving account that allows you to contribute assets and recommend grants to qualified charities, you may benefit from a blended approach to charitable giving. For example, you could make a smaller cash donation of $1,000 or $2,000 to claim the new charitable deduction, and then direct the remainder of your intended gift to a DAF if that aligns with your preferred giving strategy.
2. If you itemize: “Bunch” deductions for maximum impact
For taxpayers who itemize, “bunching” deductions can be a smart strategy to maximize tax benefits. This involves timing your charitable donations and other deductible expenses so they occur within a single tax year, allowing you to exceed the standard deduction threshold and gain a greater tax advantage from itemizing.
In alternate years, when your deductible expenses are lower, you can simply take the standard deduction and leverage the new charitable deduction for itemizers for any charitable contributions. By strategically grouping your contributions, you can optimize your tax savings while continuing to support the causes that matter to you.
3. If you are retired: Consider if QCDs are more beneficial
Retired taxpayers who are 70 ½ years or older should consider how qualified charitable distributions (QCDs) can offer significant tax advantages under the new rules. With the AGI floor in place, taking a tax-free QCD from an IRA may be more beneficial than itemizing deductions, as it allows you to support charities while reducing taxable income. This strategy is particularly useful if you’re over age 73, because it can help you manage your required minimum distributions (RMDs).
In some cases, retirees may benefit from combining strategies — using QCDs alongside the new above-the-line charitable deduction or bunching itemized deductions in certain years to maximize tax savings. Alternating between itemizing and taking the standard deduction, paired with QCDs, can provide a flexible and effective approach to charitable giving.
Make an impact with your charitable giving
We can help you explore strategies to help maximize your tax benefits while continuing to support the causes that matter to you.