Guidance for Giving Under the New Tax Law
The passing of the Tax Cuts and Jobs Act (TCJA) in the final weeks of 2017 left many Americans scrambling for advice on how the new legislation will affect what they pay—and what they can deduct—on their federal income taxes.
In the past few weeks, a clearer picture has emerged, and it’s one that may be cause for concern for nonprofits around the country. But there are some silver linings.
The major change in the new tax law increases the standard deduction for individual tax payers from $6,350 to $12,000 and from $12,700 to $24,000 for joint filers. Additionally, the deduction for state and local income, sales, and property taxes is capped at $10,000—a significant drawback for residents of high-tax states like New York and New Jersey.
Taken as a whole, these changes mean that many tax payers will no longer itemize their deductions, favoring the standard deduction instead. With less incentive to itemize comes the likelihood that the nonprofit sector will see a drop-off in the number of charitable donations.
The Tax Policy Center predicts that the TCJA will shrink the number of households claiming an itemized deduction for their donations to nonprofits from about 37 million to about 16 million in 2018.
But we know that donors are motivated to give for reasons far more compelling than a tax deduction, and will keeping giving to the causes and charities they care about regardless of the new law.
That said, we want to share some advice that may help you continue to be generous in your giving and maximize what you can give under the TCJA.
Here are 3 strategies for you to consider in 2018 and beyond:
Some Good News
First, the TCJA eliminated the Pease limitation, which previously curbed charitable deductions by tax filers with adjusted gross incomes (AGI) over a certain threshold ($313,800 for joint filers in 2017).
Second, the TCJA enhanced the deduction for charitable contributions (of cash, not stock) by raising the limit that can be contributed in any one year. The limit is now 60% of your adjusted gross income (AGI), up from 50%.
However, the limit on contributions of appreciated stocks or property remains at 30% of AGI—which brings us to…
Donating Appreciated Securities
This has long been a smart tax strategy, but it is even more valuable now. Gifting appreciated stock to charity—that’s held for at least a year—allows you to avoid capital gains taxes, which means you save even more due to the cap on deducting state and local taxes. The charitable entity—which can also be a Donor Advised Fund—will receive the fair market value of the stock. In fact, we recommend going the DAF route, since many charities aren’t set up to receive securities—and you’ll have the flexibility to give to more than one charity through the DAF, at whatever pace you’d like.
This is a great strategy whether you’re itemizing or taking the standard deduction, since it will reduce your overall taxable income.
Charitable Bundling though a Donor Advised Fund
You may see greater benefit from “bunching” or “bundling” your charitable giving through a Donor Advised Fund. Making a large contribution to a DAF can allow you to exceed the standard deduction in one year, then spread out distributions from your DAF to charities over the coming years. This is especially helpful if your income may also be bunched—if you earn more than what’s typical or more than anticipated next year—so you can maximize your itemized tax deductions and still be able to support your favorite causes as you would have under the previous tax law.
Putting Your Retirement Account to Work
Additionally, if you’re 70 ½ or older, you can still direct the mandatory distribution from your IRA retirement account—up to $100,000—to the charity of your choice (albeit not a Donor Advised Fund). This is a beneficial strategy for those who won’t be itemizing their deductions under the new law but still are financially fortunate, as it will help reduce your taxable income. Learn more about this approach from Alan Sloane of the Washington Post.
Note that most of these changes are only through 2025 and you always want to consult your own tax advisor for how the new law affects your particular circumstances. And if you want to learn more about how a Donor Advised Fund can work for you, get in touch with our Donor Services team today.