New Tax Laws Impact on Charitable Contributions
“I am only one; but still I am one. I cannot do everything, but still I can do something. I will not refuse to do the something I can do.” – Helen Keller
Let’s begin with a discussion of the recently passed tax cuts and jobs act. Some of the changes that would have an impact on people who give with the expectation of receiving a tax break are:
- Individual tax rates have decreased.
- There is a decrease in taxes for qualified business income from a partnership, S Corporation or sole proprietorship (including trusts and estates) as well as a 21% tax rate on C-Corporations.
- The standard deductions have been increased from $6,350 to $12,000 for single filers, $9,350 to $18,000 for heads of household; and from $12,700 to $24,000 for couples filing jointly.
Regarding 1, 2 and 3 above, the glass half-empty point of view is that middle-class individuals might give less. However, the glass half-full view point is that, due to reduced taxes, people might give more since they may have more disposable income.
Note that those who were only able to make small gifts will not be affected because these givers always paid dollar for dollar when making charitable contributions.
- For upper middle-class and wealthier donors, the new tax law not only keeps the charitable deduction, but increases the limit on cash contributions from 50% to 60% of adjusted gross income when given to charity.
- The new tax act did not repeal estate taxes, but the exemption amount was increased to $11.2 million for individuals and $22.4million for married couples. This means that fewer Americans will be impacted by estate taxes upon their death.
Tax Tips In Consideration of New Tax Law
- Many people wait until after their death to give a portion of their estate to charities. However, due to income tax advantages, it might prove beneficial to donate during life rather than at death. Of course, the advantage to the charity would be that they would benefit now rather than many years in the future.
Choosing the right assets to donate can expand available tax benefits. For instance, gifting appreciated securities to charity will generally eliminate long-term capital gain recognition as well as generating an income tax deduction. This not only decreases taxes, regardless of whether or not you itemize, but also increases the amount that goes to your charity.
In consideration of the new higher standard deductions, bunching can be a great way to take advantage of itemizing. What a person does is bunch their charity and other deductions in order to itemize in one year. The following year they would rely on the standard deduction. This particular strategy would be repeated every two years. However, the charity may need a steady stream of donations each year in order to operate. A solution to this is the Donor-Advised Fund. The donor contributes the entire amount to the donor-advised fund in order to get the charitable donation up front and then donates each year to the charity. (See the section on Donor Advised Funds).
Qualified Charitable Distributions
The new tax law doesn't change the rules regarding qualified charitable distributions, allowing people older than 70 1/2 to transfer up to $100,000 from their IRAs to charity each year and have it count as their required minimum distribution without being added to their adjusted gross income, if done correctly.
The new law doesn't change the basic rules for charitable deductions (other than increasing the deduction limit for each contribution from 50% to 60% of your adjusted gross income). However, because the new law nearly doubles the standard deduction, fewer people will itemize deductions and you can only deduct charitable contributions if you itemize.
But the tax-free transfer from an IRA lets you benefit from making the gift to the charity even without itemizing. This way you can still take the standard deductions, but your charitable gift isn't included in your adjusted gross income and therefore isn't taxed.