Q: Over the last few years, I’ve gotten used to using my IRA checkbook for my donations. My advisor told me these IRA donations helped lower my taxable income. Now, with the new tax law, I heard I can just use my regular checkbook again and still get a tax break? Is that true?
A: Congress has, in fact, brought back the idea of a small deduction for charitable donations, even if you don’t itemize. Beginning next year, non-itemizing taxpayers can deduct cash donations of up to $1,000 (single) or $2,000 (married.)
If you remember, during COVID we had a similar special add-on charitable deduction in the tax law. But that feature expired after just a couple years. This new one is “permanent”, unless Congress changes its mind, of course.
The new deduction limit is pretty small, though. So, I’d say donating from your IRA directly is still the better approach. Your IRA donations don’t show up on your tax return at all and they help to satisfy your required minimum distribution (RMD.) Using your IRA is still the cleanest, most efficient way to donate money.
In my view, the best part about this new feature is, starting next year, you’ll at least enjoy a tax break even when you accidentally grab the wrong checkbook to make that donation. From my experience, this mistake happens all the time!
Q: I’m a business owner and have been using Michigan’s Flow-Through Entity Tax (FTET) to get around the $10,000 federal SALT deduction cap. With the SALT cap now set at $40,000, does it impact business owners like me who use the FTET?
A: As you know, back in 2018 when Congress set a $10,000 cap on the deduction of state and local taxes (SALT), a lot of states scrambled to find “workarounds.” They came up with the Flow-Through Entity Tax (FTET.)
The FTET move allowed business owners of pass-through entities (LLCs and S-Corps) to pay a portion of their personal state income taxes through their business. This turned those taxes into a business expense and it effectively lowered their federal tax bill. For high-earning business owners, this move allowed them to bypass the low $10,000 SALT cap.
Under the new tax law, Congress boosted the SALT cap to $40,000. As a result, some worried that the FTET workaround would disappear. Surprisingly, the new tax bill left this workaround untouched. So, your move to route your state income tax liability through your business is still a sound strategy.
For those who have not been using the FTET workaround, the higher $40,000 SALT cap might help some. But, maybe not as much as you’d think. Why is that? Remember, the standard deduction is pretty big already. For example, for married filers, the standard deduction in 2025 is already set at $31,500.