The good, bad, ugly about donating under new rules
Larger standard deduction complicates write-offsMarch 15th, 2018
The new Tax Cuts and Jobs Act takes effect this year, and Americans are hard at work deciphering what the changes mean. One goal of the new tax law was to simplify filing for more taxpayers. Consequently, the standard deduction has nearly doubled, eliminating the need for many to itemize their deductions to realize greater tax benefits.
For those involved in charitable giving—either as a benefactor or as a recipient—the change has ramifications that may be interpreted as good, bad, and perhaps even ugly, though perhaps it is too soon to judge.
First, a little background: Last year, about 30 percent of taxpayers itemized their deductions, the only method by which charitable contributions could receive favorable tax treatment. Standard deductions were $6,350 for individuals and $12,700 for married couples, filing jointly.
Under the new tax law, the standard deduction for individuals increases to $12,000 and to $24,000 for those who are married, filing jointly. For many, that leap means that itemizing deductions will not offer the same tax savings this year.
For those who make donations with an eye toward improving their tax bill, the new tax law may not provide enough incentive depending on a donor’s means. Given that the standard deduction has nearly doubled, some charitable organizations are concerned that donors who make small to moderate gifts on a regular basis may curtail their giving if it is not enough—when coupled with any other qualifying deductions—to exceed the standard deduction and reduce their overall tax liability.
Charitable organizations are justified in their concern. For instance, the Tax Policy Center issued a preliminary report that more than 37 million taxpayers itemized deductions for charitable contributions in 2017, a number expected to fall to just under 16 million this year. Additionally, some analysts have estimated that nonprofits could expect to see a drop of more than $20 billion in donations.
In Washington state, an estimated $285 million in annual contributions are at risk, according to a report from the Joint Economic Committee Democrats.
Now the good news: The new tax law retains some important charitable-giving strategies and offers potential to encourage taxpayers to continue—or even increase—their giving.
First, Americans who are 70 1/2 or older can continue to make charitable contributions directly from their individual retirement accounts without incurring taxes. Once an IRA holder reaches age 70 1/2, required minimum distributions take effect. If an individual is financially secure, they may choose to make a direct transfer to a charity of their choice, fulfilling the requirement to take a distribution without adding the disbursement to their adjusted gross income. The amount transferred should be at least equivalent to the required minimum distribution, but no more than the cap of $100,000 per year.
Second, the deductibility of charitable gifts has increased this year, from 50 percent of adjusted gross income to 60 percent. For those who are able to make larger gifts, there is potential to see a greater tax benefit and an incentive to increase charitable contributions.
Finally, the new law has been touted as offering potential for more tax savings given the higher standard deduction. Time will tell if savings come to fruition. If they do, it’s possible that some taxpayers will share their good fortune and continue—or even grow—their support for favorite causes.
Coping with the bad: For many, one tax season is much like any other, and taxes are filed using the same approach year after year. In light of the new tax law, this may be the year that taxpayers take a fresh look at how they handle their taxes as well as their charitable giving.
For many earners who make small to moderate charitable contributions, the tax benefit associated with itemizing deductions likely will fall away. If donating has been a financial sacrifice and only tolerated knowing that a tax benefit is forthcoming, then donors may think twice about what they can afford to do now. It might be possible to continue supporting worthy causes by adopting strategies that require careful planning, such as alternating tax filing methods or “bunching” contributions.
In alternating tax filing methods, taxpayers would itemize deductions one year, take the standard deduction the next and continue alternating. In the years in which a taxpayer itemizes, they would make significant charitable contributions—two years’ worth of their normal giving, or enough to exceed the standard deduction for a bigger tax break. If cash flow is an issue, donations could be spaced far apart, made early in January and again late in December of the same year. The next year, giving would be suspended to allow those funds to replenish.
Another strategy to consider is bunching— also known as stacking or lumping. With this approach, taxpayers may donate several years’ worth of funds at once to enjoy the immediate tax benefit. Contributions could be made directly to charities of choice, but a drawback is that the beneficiary would receive a large gift at once rather than at regular intervals for predictable funding.
An increasingly popular vehicle for taxpayers using bunching is placing assets in donor-advised funds. Donors make an irrevocable gift to a fund and receive an immediate tax benefit, although the proceeds can be directed to selected charities later. A disadvantage is that donors relinquish control of their assets, as the fund ultimately decides where the money goes.
Leaving off with the ugly: The ugly aspect of the new tax law is the uncertainty of outcomes. For nonprofits, there is a fear that the higher standard deduction will dissuade some donors if their tax write-off disappears. For taxpayers, it may be necessary to be more selective and strategic about how and how much they give.
Although the new tax law introduces uncertainty, the bottom line with giving is to do so from the heart. Being passionate about a purpose—and being able to make a difference with a financial contribution—can be immensely fulfilling.
Rob Blume is the managing director and senior vice president of wealth management and advisory services at Spokane-based Washington Trust Bank. He can be reached at firstname.lastname@example.org.