The annual process that we all face as taxpayers is now underway — pulling together documents to file your federal, state and local tax paperwork. One aspect of the federal tax code that will change significantly in 2018 involves charitable giving. The changes are raising questions for tax specialists, taxpayers and charitable organizations that receive donations. Here’s what you need to know.
While we would like to believe charitable giving is purely motivated by an individual’s desire to benefit a cause near and dear to his or her heart, tax savings can be a driver. One side effect of the Tax Cuts and Job Act of 2017 (TCJA) is its potential impact on charitable giving.
Specifically, three changes to the tax code may diminish charitable gifts:
1. Lowering the individual income tax rates reduces the value of the charitable tax deduction.
2. Fewer individuals will itemize their deductions due to the increase in the standard deduction to $12,000 for individuals and $24,000 for couples, and the decision to cap the deduction for state and local taxes at $10,000. An estimate by the Tax Policy Center suggests the changes will shrink the number of households claiming an itemized deduction for their charitable gifts from $37 million to about $16 million in 2018.
3. And, an increase in the estate tax exemption to $11.2 million for individuals or $22.4 million for couples. This means fewer estates are taxable, eliminating the need for individuals to reduce the size of their estates through charitable donations.
Thankfully, most people give to make an impact, not just for the tax savings, and there still are ways to capitalize on those gifts. First, consider gifting from your IRA, also known as a Qualified Charitable Deduction or QCD. IRA owners ages 70½ and older can gift up to $100,000 annually directly from their IRAs. This is especially attractive to donors who do not itemize since it reduces their taxable income. Certain rules and restrictions apply.
Second, consider “bunching.” Bunching refers to the strategy of combining gifts that would be made over several years into a single gift so that your itemized deductions exceed the standard deduction. There are several options beyond simply writing a large check to a single charity. You might consider funding a donor-advised fund, which allows you to donate money and take a tax deduction in the same year and then pay the money to select charities over time. Other options to consider for large gifts include charitable remainder trusts or charitable gift annuities. Because the deductions for remainder trusts and gift annuities tend to be larger, you may be able to itemize in the year a gift is made and retain a lifetime annuity payment in the process.
A third option is to make a gift of highly appreciated assets. This allows the donor to avoid the capital gains tax that would be due if the assets were sold, offering tax savings even if the taxpayer uses the standard deduction. This strategy also can be used in combination with the other options listed above.
One last thought: high net worth philanthropic individuals should review their estate plans. If your estate plan calls for giving everything over the estate tax exemption amount to charity to avoid paying any estate tax, your plan may no longer benefit your favorite charity if your estate is under $11.2 million.
We are blessed in West Michigan with a culture of philanthropy. The charitable spirit is especially prevalent with prominent families in the region who set an example for many of us to follow. This culture is not likely to change simply because of changes in tax law. But it is important to fully understand the new tax code so you can determine how to maximize the impact of your giving on the charitable organization while at the same time maximizing the tax benefit for you and your estate.
In the end, we are reminded of the words of Aristotle.
“To give away money is an easy matter and in any man’s power. But to decide to whom to give it, and how large and when, and for what purpose and how, is neither in every man’s power nor an easy matter.”
Kelly DeRidder is senior vice president and senior trust officer at Legacy Trust in Grand Rapids. She can be reached at email@example.com.