Charitable Giving Strategies Under Tax Reforms

Under the Tax Cuts and Jobs Act (TCJA) of 2017, there was one topic of the tax law that seemed largely unaddressed: charitable donations. That didn’t prevent several other aspects of the act from having meaningful ramifications on the outlook for charitable giving as a whole throughout the country. While many people are wondering how their personal tax situation will change, charitable organizations have their own concerns.

Impact of Tax Reforms

Perhaps the most notable change for taxpayers is that the standard deduction increased to $12,000 for single filers and $24,000 for couples filing jointly. Furthermore, state and local tax deductions were limited to $10,000 and the deduction for mortgage interest was capped on mortgage amounts up to $750,000. Combined, these make a perfect storm for substantially fewer households itemizing. The Tax Policy Center estimates that the percentage of households that itemized will drop from 30% in 2017 to 10% in 2018. That’s more than 21 million households.

Without itemizing, taxpayers receive no marginal benefit for any additional charitable contribution. Lower marginal tax rates overall also means lower incentives to give.

The estate tax exemption also doubled, which compounds this problem even further by reducing incentives to make charitable bequests by will or other estate planning measures. Given all these factors, it’s understandable why many charities are concerned about the effects the new law will have on their receipt of donations and ultimately funding their budgets to carry out their missions.

The American Enterprise Institute estimates that charities will collect $16.3 to $17.2 billion less in donations this year as a result of tax law changes. Of course, there’s no one way to make up for such a large number. But for the charitably-minded individual, there are still plenty of advantages strategies to donate to the causes that mean a lot to them.

Qualified Charitable Distribution from an IRA

One strategy that existed previously and has suddenly gained a great deal of appeal is the qualified charitable distribution (QCD). At age 70.5, individuals are subject to required minimum distributions (RMDs) from any IRA accounts. These distributions are generally taxed as ordinary income, to the extent that it is tax-exempt contributions or gains. As an alternative, these individuals can request that all or a portion of their distribution be delivered directly to a qualified charity as a QCD.

As opposed to taking the money out yourself and being subject to tax on that amount, and then giving the money to charity, a QCD forgoes generating the taxable income to you. This is very similar to receiving a deduction for the donation but doesn’t require the taxpayer to itemize. As a further benefit, this amount counts towards fulfilling the annual RMD.

The one limitation on this strategy is that the amount you can donate is capped at $100,000 per year. The QCD amount also lowers the amount of your adjusted gross income (AGI), which may be used in limitations for other deductions, including your other charitable contributions.

Double Up Contributions

If your personal tax situation does not provide you a benefit to making your charitable deductions, you could consider making them double in any one calendar year. That’s not to say double the amount of your giving, although I’m sure your charities would appreciate that. Instead, you only need to alter the timing of the gifts to make them fall within the same calendar year.

For example, in a normal year a married couple with the $10,000 maximum state and local tax deduction, $3,000 of mortgage interest and $10,000 of charitable donations would have $23,000 of itemized deductions and the couple would instead opt to use the standard deduction of $24,000.

However, if they organized with their charities to accelerate two years of gifting into one year they would have $33,000 of itemized deductions. This produces an additional $9,000 tax deduction in that year. The second year, they will use the standard deduction just as they would have otherwise.

Gift Appreciated Securities

A tried and true practice that makes sense for nearly any charitable gift is donating appreciated securities instead of cash. By giving stocks, you maintain receiving the deduction amount, but get the added benefit of avoiding paying capital gains tax on the sale of the security.

Any security gifted in this way needs to be long-term holding and held greater than one year. Your designated charity will also need to have the established account to receive this gift, which most major charities do. Also, since you are giving something with a fluctuating market value and in a set amount of shares, it is likely that your actual gift value fluctuates slightly from your intent. A $5,000 gift is likely to actually be $4,950 or $5,050.

Donor-Advised Funds

If the doubling of gifts or gifting securities doesn’t work logistically for your charities, you can always make a gift to a donor-advised fund. This allows you to take the deduction in the present year, invest these funds for some time, and ultimately control the distribution in the future. Generally, this is allowed to be any 501(c)(3) qualified charity.

Nearly every major brokerage has one of these foundations that make establishing an account, selecting investment options, and directing distributions very easy and painless. Furthermore, this simplifies your tax reporting as you should receive a Form 8283 from your brokerage firm with the pertinent details of your contribution. Your investment horizon need not even be a long period. The donor-advised fund might provide a vehicle to simply accept a stock gift and then sell this to fund a cash gift directly to the charity.

The New Environment

For charitable-minded individuals, there were a couple of nice changes the Tax Cuts and Jobs Act. The limitation on deductions for cash gifts to charity was increased from 50% of AGI in 2017 to 60% in 2018. Amounts in excess of this can still be carried forward for up to five years. If you experience a situation where it makes sense to give a very large amount relative to your income, you can still find a way to do this.

In addition to this, the Pease limitation was repealed from the tax law. Previously, this meant itemized deductions for high-income taxpayers would begin to phase out once their adjusted gross income reached a certain level. For 2017, this occurred for households that had $313,800 of income and were married filing jointly. This is no longer the case. Regardless of income, itemizing filers can receive the full benefit of additional charitable contributions.

Although charitable giving has lost some of its straightforward benefits under the current tax regime, there are still plenty of strategies to employ that provide a very real benefit. There’s never been a better time to speak with both your financial advisor and your preferred charities about how to best achieve your philanthropic desires. You can know that by being proactive, you are on the right side of the giving public.