The Tax Cuts and Jobs Act was passed with much fanfare in December 2017 and has had significant, far-reaching implications. While the impact of this tax reform is generally positive for taxpayers, one area of concern is the effect it will have on charitable giving to non-profit organizations. We’ll be looking at exactly how you can navigate the complexities of tax reform and charitable giving.
Issue: Changes in Tax Deductions
Taxpayers can elect to take the “standard deduction” or “itemized deductions” (interest, state and local taxes, charitable giving, etc.) when filing their 1040 tax return. Under the new tax law, the standard deduction increased from:
- $6,350 to $12,000 for single filers
- $12,700 to $24,000 for married couples filing jointly
The goal of this provision was to reduce taxable income on low- and middle-income Americans and compensate for the elimination of personal exemptions. However, it has unintentionally disincentivized certain taxpayers from donating to non-profits by decreasing the number of taxpayers who will itemize deductions. When taxpayers elect to take the standard deduction, they consequently receive no tax benefit from their charitable giving.
The concern is that as tax incentives to donate are reduced, individuals may choose to reduce or eliminate their charitable giving. The issue is further compounded by the fact that other common itemized deductions such as state and local taxes are now limited, further increasing the number of taxpayers choosing the standard deduction.
To drive home the potential effect on charitable giving, The Joint Committee on Taxation has estimated that:
- Taxpayers electing to itemize deductions will decrease 58% from 2017 to 2018 (48.7 million down to 20.3 million).
- There will be an approximate $13 billion annual decrease in charitable giving as a result of the change in tax laws.
Solution: Charitable Giving Strategies
Bunching Charitable Donations
This method allows taxpayers to combine all of the donations they would ordinarily make over a two year period into one year. This will increase the likelihood that they can itemize deductions in the year of their contributions. Then, in the second year, they can still elect the standard deduction.
Expert Tip: Donors should consider contacting the non-profit(s) they are supporting and notifying them that their contribution covers a two year period. This will allow the organization(s) can plan effectively.
Using Donor Advised Funds for Charitable Giving
Taxpayers can set up a donor advised fund (DAF) and make a contribution that’s equivalent to their total expected giving amount over the next few years. The contribution is generally tax deductible when paid to the fund directly. Once the fund is set up and the contribution has been made, the individual can donate to their designated non-profit organization(s) from their DAF.
Example: If you typically give $10,000 to Charity X annually, you could instead contribute $30,000 to a DAF in the first year, which would be fully deductible. Then, for the next three years, you could donate $10,000 to Charity X from the advised fund annually.
Similar to bunching donations, this option could allow a taxpayer to itemize deductions in the year of their contribution and then still take the standard deduction in subsequent years.
Additional Charitable Giving Options
Donors can also consider other tried-and-true methods when it comes to donating to charity. These methods include:
- Charitable gift annuities
- Charitable rollovers from a retirement account
- Donation of appreciated assets (stocks)
While the Tax Cuts and Jobs Act has the potential to negatively impact charitable giving, effective strategies do exist for donors and non-profits to mitigate this impact. By employing the above strategies, donors can still successfully lower their overall tax bill while supporting their designated non-profit organizations. That’s a win-win for taxpayers and the community at large!