The Tax Cuts and Jobs Act made significant changes to individual taxation for tax years after 2017. One of the most significant individual changes is the amount of the standard deduction. This deduction is now $12,000 for singles or marrieds filing separately, $18,000 for heads of household, and $24,000 for joint filers and surviving spouses (for taxpayers under age 65). Two other changes include the elimination of all miscellaneous itemized deductions and a limitation of $10,000 for combined state/local property tax, state/local/foreign income tax, and (if elected) general sales tax. This means, as a practical matter, that if medical expenses are insufficient to exceed the 7.5% Adjusted Gross Income threshold, your remaining itemized deductions are the taxes deduction with a limitation to $10,000, your mortgage and other deductible interest expense, and charitable contributions.
As a result of the change in the standard deduction amounts and the $10,000 limitation on the taxes deduction, the Joint Committee on Taxation (JCT) estimates that only 13% of taxpayers will itemize their deductions. This means that 87% of taxpayers will likely receive no tax benefit from making charitable deductions. The National Council of Nonprofits estimates that charitable donations may shrink by $13 billion or more each year. The Council on Foundations estimates that the new rule will decrease charitable giving in the U.S. by $16 billion to $24 billion annually (total giving was $390 billion in 2016, according to Giving USA). This would result in a significant number of job losses in the non-profit sector and a decline in services offered by operating nonprofits.
Here are possible approaches to retaining tax benefit and still making charitable contributions. Let’s assume you are a joint filer (married couple) with at least $10,000 in the Income and property tax deduction category. You will need at least $14,000 in the allowable interest deduction category (usually mortgage interest) and the charitable contribution category before your itemized deductions exceed your standard deduction amount. If you have mortgage interest of at least $14,000 (implies a mortgage in the $350,000 to $400,000 range based on typical mortgage rates), then you have already exceeded the standard deduction of $24,000 and will get full tax benefit for your charitable contributions.
Now change the facts to that of being a taxpayer with no mortgage interest to deduct. You would now need to make charitable contributions of $14,000 before you start receiving any income tax benefit of additional contributions. One approach is to bunch multiple years of contributions into one year so that the amount is high enough to get a tax savings for your contributions. Basically, you make two or more years’ worth of donations in a single year so that you’ll end up with enough deductions to itemize in that year. Then you pass on making donations in the succeeding one or two years.
An alternative approach is to establish a Donor Advised Fund (DAF). The donor advised fund is established at a public charity. This allows the donor to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. You may donate cash or appreciated stock to a DAF (and in some cases, other types of assets). The idea is that you would donate a much larger amount of cash or appreciated stocks to the DAF than you would donate in one year and then direct the funds to charities over multiple years. Please note that you cannot direct your IRA Required Minimum Distribution (RMD) amount of a DAF (see below). A donor advised fund also makes it easy to involve younger generations in family philanthropy.
If you are age 70 ½ or older, you can direct up to $100,000 per year from your traditional IRA tax-free to a public charity. It will count as your required minimum distribution. Therefore, the distribution amount is not income on your tax return and there is no charitable donation on your itemized deduction schedule. You do not report the distribution as income and do not claim a charitable deduction. This also has the benefit of holding down your adjusted gross income which is used in determining your Medicare parts B and D insurance premiums as well as hold the percentage of your Social Security benefit that’s subject to taxes. Please note, you cannot direct this type of transfer payment to a private foundation.
I recommend that you consult your financial advisor or tax accountant to determine the best strategy for your specific tax situation, and I am more than happy to assist in answering any questions you may have. Remember, charities still need your assistance and there are a variety of ways to plan your charitable giving that still have favorable tax consequences.
Timothy P. Watson, CPA, MBA, MT
Tax Partner, Anton Collins Mitchell LLP (ACM)