Don’t Itemize? Doesn’t Matter. You’re Getting a New Tax Break.

Filling out a tax form will be more complicated (Dreamstime)

The tax bill signed last week by President Donald Trump is a mixed bag of good and bad news for people who make charitable gifts.

Starting next year, people who itemize deductions will get a haircut on their charitable deductions, while those who claim the standard deduction can deduct some gifts for the first time.

“Taxpayers face a complex decision tree that they didn’t have before: Whether they’ll get more benefit out of their charitable gifts if they take the standard deduction or if they itemize,” says Michelle Soto, a partner at Cerity Partners.

Under current law, the only way to be able to claim a charitable deduction is if your deductible expenses exceed the standard deduction and you itemize.

But in recent years it has been difficult to accrue enough deductible expenses to exceed the standard deduction, so most people have claimed the standard deduction and have gotten no tax benefit from their charitable gifts.

This has been the case since 2018 when the Tax Cuts and Jobs Act substantially raised the standard deduction and limited deductible expenses.

Not only was a $10,000 cap enacted on deductions for state and local taxes (SALT), but deductible expenses were scaled back. For example, miscellaneous expenses such as fees for investment advisory services were eliminated and limits on mortgage interest deductions were tightened.

Between 2017 and 2020, the percentage of taxpayers who itemized and could get any benefit from charitable gifts dropped to 9% from 31%, according to the Tax Policy Center. The percentage itemizing should rise again with the new tax law.

It bumped the SALT cap to $40,000, creating a huge deduction for millions of Americans. “With the SALT cap at $40,000, more people are going to find they will itemize,” says Jim Daniels, a managing director at UHY.

But millions will still take the standard deduction and won’t itemize. Effective for 2025, the standard deduction was raised to $31,500 from $30,000 for couples filing taxes jointly, and to $15,750 from $15,000 for single and other filers.

Here’s a look at the charitable gifting changes under the bill:

Some deductions are allowable with the standard deduction

For taxpayers who claim the standard deduction instead of itemizing deductible expenses, beginning next year single filers will be able to deduct up to $1,000 in charitable cash gifts, and couples filing a joint tax return will be able to deduct up to $2,000.

“What do not qualify for deductions under this rule are gifts to donor-advised funds,” says Richard J. Miller Jr., a partner at Hughes Hubbard and Reed.

Donor-advised funds are investment funds where you can deposit assets, then pay out to charities in future years.

The new bill clarifies that contributions to donor-advised funds and private foundations are only deductible if you itemize.

A floor is established for charitable deductions

Under the new law, taxpayers can only itemize charitable gifts that exceed 0.5% of their adjusted gross income. The change goes into effect next year.

Currently, as long as you itemize deductible expenses, your first dollar gifted is deductible.

“Starting next year, if someone has $1 million in income, they would lose the first $5,000 in deductible charitable contributions,” says Steve Baxley, head of tax and financial planning at Bessemer Trust.

The lost deduction in any year can be carried forward to potentially use in future years.

This change puts certain common tax-planning practices in question, Baxley says.

If you sell a business and have, say, a $100 million gain, normally a charitable gift would be a clean way to offset some of your tax liability, he says.

“That might not be the best move under the new rules, because you’re going to lose a lot of that charitable contribution,” Baxley says. “With a $100 million gain, you would lose $500,000 of your charitable deductions.”  (The gain presumably would give you adjusted gross income of at least $100 million, and 0.5% of that amount is $500,000.)

Given that this limit goes into effect next year, taxpayers should consider accelerating future years’ charitable contributions into this year, Soto says.

And don’t dawdle. “People often use December as a time to give, bud do yourself a favor and do it earlier so you have time to factor in the new rules.”

The value of deductions is capped

The new bill establishes a 35% cap on the value of itemized deductions, beginning in 2026.

This impacts people who are in the top 37% income tax bracket.

“Under current law, you would get a benefit equal to 37 cents on the dollar,” Baxley says. “Now you will get 35 cents on the dollar. It’s not a giant reduction, but it’s a reduction.”

A new charitable credit

The bill establishes a new nonrefundable credit for cash contributions to charities whose primary function is to grant scholarships for students attending primary or secondary school. The maximum credit is $1,700.

While a deduction reduces your taxable income, a credit is a dollar-for-dollar reduction in the tax you owe.

“Under current law, you can get a deduction for making a donation to a scholarship granting organization if you itemize,” Daniels says. “Starting in 2027 you will be able to get a credit, which is more valuable.”

Write to editors@barrons.com