We recently sat down with Matthew Pierce, a former Board Treasurer at First Image and accounting professional, to discuss the recent changes in the tax code. Watch the video to see how the changes might affect you and what that means for charitable giving. You can also ready his summary below.
Can you briefly explain the changes to the tax code?
The recent changes represent the largest overhaul of the tax system in the last 30 years.
For the average family, the two most significant changes are to the tax rates within each tax bracket, which have been lowered, and to the standard deduction, which has been doubled for married couples that file jointly (from $12,700 to $24,000). For businesses, the rate has also been significantly reduced.
If you are wondering how the change will affect you, there are a number of calculators online that estimate the impact, but talking to your tax professional is the surest way to know.
The change in the tax rates means that an estimated 95% of families will see their taxes go down in the 2018 tax year. As of February, most employers have also implemented the new withholding tables from the IRS, which means that many families have already seen increases in their take-home pay.
The increase in the standard deduction means that many families will no longer have to itemize their deductions in order to reduce their taxable income.
How will these changes affect my charitable deduction?
It’s important to remember that the deduction isn’t going away and the government still provides giving incentives by allowing our generosity to impact our taxable income. There is no downside to giving as it relates to your taxes. It only means that your deduction might not exceed the standard deduction, and therefore further reduce your taxable income.
While we are appreciative of the tax benefits that come from our government, it’s important to remember that as Christians, we don’t give for the tax write-off. I’ll take any tax write-off that comes my way, but whether my government takes 8% or 85% of my income, I am still responsible for how I steward what I have available to me.
As Randy Alcorn has said, “God prospers me not to increase my standard of living, but to increase my standard of giving.”
Are there strategies I can use to maximize the impact of my giving?
I would hope the changes actually increase giving rather than decrease it. My wife Amy and I are expecting to be able to give more than ever in the coming year because less of our money is going to Uncle Sam. So in that sense, the changes should increase most peoples capacity to give.
Beyond that, there are a few approaches you can use to maximize the tax benefits of giving.
- One is called bunching. That’s where you give a lump sum at the beginning and end of the same tax year (like on Jan 2nd and Dec 31st) instead of in separate calendar years. That allows you to potentially exceed the standard deduction in a year where it would be more helpful to you, but still provides consistency of support to the organizations you care about.
- Another newer, but slightly more complicated approach, is a donor-advised fund. That’s a separate 501(c)3 organization that you give your lump sum to, they then give those funds to the organizations you have chosen on a schedule you decide upon. That allows organizations to receive funds in a more regular way while giving you the tax benefit of a lump gift.
- Increasing your giving also has benefits to both the organizations you give to and yourself! Increasing the amount of your giving is the surest way to increase the impact on your taxable income.
- Talk with a tax professional. Every situation is different and they’ll be able to effectively walk you through the decision making process.