Q. Hi, Dan. I don’t understand why people are talking about the new deduction for charitable gifts next year. Haven’t charitable gifts always been deductible? — Carl in Rockledge
A. Carl, for millions of Americans, donations to charity are effectively not deductible because most households do not spend enough on specific things to “itemize deductions” and therefore use the standard deduction when calculating their taxes. Starting in 2026, the new deduction is getting a lot of publicity because it will enable the estimated 90% of households that use the standard deduction to get a deduction for donations to charity. I’ll give you an example.
First, we must tally up the expenses we could itemize. These expenses are listed on Schedule A of Form 1040. The basic list of such expenses are certain out of pocket medical and dental expenses; state and local taxes; home mortgage interest; charitable contributions; casualty and theft losses from a federally declared disaster; gambling losses to the extent of gambling winnings; bad debts; investment interest expenses; and amortizable bond premium.
Keep in mind, all of the items just listed come with significant qualifiers. For instance, for medical and dental expenses, only amounts paid out of pocket that exceed 7.5% of your Adjusted Gross Income (AGI) can go on Schedule A.
Now, say a couple, both under age 65 have a total of $21,500 of itemized expenses on Schedule A for 2025, before factoring in any charitable donations. Because this is less than their standard deduction of $31,500, they would use the standard deduction and reduce their taxable income by $31,500. Their tax bill will drop accordingly.
If this couple wrote a $2,000 check to a qualified charity, they would have a total of $23,500 in itemized deductions and would therefore still use the standard deduction of $31,500 to reduce their income. The $2,000 did not alter their tax calculation at all. In fact, for them, the first $10,000 they donate to charity is effectively not deductible and will not lower their taxable income or their tax bill.
What does ‘cash’ mean with this 2026 change?
Starting in 2026, a new charitable deduction will be available for gifts of cash. “Cash” is literally cash as well as checks, electronic transfers, and credit card payments. The deduction is limited to a cumulative total over the course of the year of $1,000 per person, $2,000 per couple. However, income level is not a factor so taxpayers up and down the economic spectrum could benefit.
If our hypothetical couple writes that $2,000 check to charity in 2026, they will use the standard deduction again but will also claim an additional $2,000 of charitable deductions.
Because so many taxpayers have not been getting any deductions for their generosity, many have gotten out of the habit of keeping receipts and acknowledgements from charities. Starting January 1, these documents should be retained.
One other note for those age 70½ that make their donations via Qualified Charitable Distributions (QCD) from their IRAs. It remains better to make donations through QCDs than as cash contributions to get the new deduction. QCD are made with pre-tax dollars while the cash contributions must come from after-tax funds. Further, QCD do not count as part of the calculation for Adjusted Gross Income (AGI). As AGI increases, some deductions decrease and additional taxes or other costs can kick in.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, ext. 101.
Originally published on FloridaToday. Read the original article here.