Tuesday, July 10, 2018
The Tax Cuts and Jobs Act made significant changes in the tax law. That’s an obvious conclusion. It also changed some of the rules associated with charitable giving, and other rules that have an impact are likely to impact a taxpayer’s decision to donate to charity. Because of these changes, some charities have expressed concerns about a potential decline in charitable giving overall.
Is a drop in overall charitable giving likely? If so, are there planning options that can be utilized to preserve charitable deductions for charitable gifts?
Post-2017 charitable giving. That’s the topic of today’s post.
For tax years beginning before 2018, taxpayers that itemized deductions (Schedule A) could deduct charitable donations of cash or property to qualifying organizations. That remains true for tax years beginning after 2017. However, the TCJA has made a couple of important changes. Pre-TCJA, most cash contributions were generally limited to 50 percent of the taxpayer’s “contribution base.” “Contribution base” is defined as the taxpayer’s adjusted gross income (AGI). For this purpose, AGI is computed without including any net operating loss carryback to the tax year. I.R.C. §170(b)(1)(H).
The 50 percent limit applies to donations of ordinary income property and cash to charitable organizations described in I.R.C. §170(b)(1)(A). Those charities include public charities, private foundations other than nonoperating private foundations, and certain governmental units. Donations of capital gain property to these entities are limited to 30 percent of the taxpayer’s contribution base. Donated capital gain property to these organizations that are for the purpose of allowing the charity to use the property is capped at 20 percent of the donor’s contribution base. Gifts to non-operating foundations are capped at 30 percent of the donor’s contribution base for gifts of ordinary income property and case. The cap is 20 percent for capital gain property gifted to a non-operating foundation.
Under the TCJA, effective for tax years beginning after 2017 and before 2026, the 50 percent limitation is increased to 60 percent. Thus, an individual taxpayer can deduct cash contributions up to 60% of contribution base for donations to I.R.C. §170(b)(1)(A) organizations. I.R.C. §170(b)(1)(G)(i). Any amount that is disallowed due to the limitation can be carried forward for five years. In addition, for taxpayers that have contributions of both cash and capital gain property in the same tax year, the cash contribution will reduce the amount of deduction for the donated capital gain property.
Example: Tammy has a contribution base of $75,000 for 2018. She donates $10,000 of cash to various I.R.C. §170(b)(1)(A) organizations. The 60 percent limitation would limit her cash contributions for 2018 to $45,000. Tammy also donated her 1969 John Deere 4020 tractor to an I.R.C. §170(b)(1)(A) organization in 2018. The tractor was valued at $32,500. Her limitation on donated capital gain property for 2018 is $22,500 (30 percent of $75,000). However, the $22,500 is reduced by her $10,000 cash contribution. Thus, her limit in 2018 for capital gain donations (30 percent property) is $12,500. Tammy will be able to deduct $12.500 of the tractor’s value in 2018 and carry forward the balance of the donated value ($20,000).
The increase from 50 percent to 60 percent on the AGI maximum deduction amount is certainly good news for taxpayers with charitable inclinations. In addition, the TCJA eliminates the “Pease limitation” (I.R.C. §68) through 2025. That rule phased-out itemized deductions at particular income levels. These two TCJA changes could, by themselves, trigger a significant increase in charitable giving – particularly by higher income taxpayers. However, the TCJA made other changes that could have an offsetting effect.
Other TCJA Changes That Could Impact Giving
The TCJA significantly increases the standard deduction – to $12,000 for single filers and $24,000 for married filing jointly taxpayers. Also, many expenses that were deductible for tax years beginning before 2018 are either non-deductible or are limited. For example, the deduction for state and local taxes associated with non-business property is limited to $10,000. The increase in the standard deduction coupled with the elimination/limitation of various deductions will have an impact on giving, particularly by taxpayers that make relatively smaller gifts. That’s because the TCJA has made it more difficult for Schedule A deductions to exceed the standard deduction. More taxpayers are likely to simply claim the standard deduction rather than file Schedule A. Without filing Schedule A to itemize deductions, there is no deduction for charitable gifts.
Normally, a tax deduction cannot be taken for a donation to a qualified charity when there is a quid pro quo. However, for tax years beginning before 2018, a taxpayer could deduct 80 percent of charitable contributions made to an institution of higher learning for the right to buy tickets or seating at an athletic event. However, the TCJA changed this rule. For tax years beginning after 2017, the 80 percent rule is eliminated.
The TCJA also increased the federal unified credit for estate and gift tax purposes such that, beginning in 2018, federal estate tax doesn’t apply until a decedent’s taxable estate value exceeds $11.18 million. That’s practically twice the amount that it was for 2017. It’s likely that this significant increase will dampen charitable bequests. Presently, about 8 percent of charitable giving derives from bequests.
Will these changes be enough to cause taxpayers to curb charitable giving? To the extent a taxpayer donates to charity based on getting a tax break, that could be the case to the extent the TCJA changes reduce the deduction associated with charitable gifts. Many charities are concerned. Historically, taxpayers that itemize deductions are more likely to give to charity than are non-itemizers. Similarly, non-itemizers make up a relatively small percentage of total charitable giving. One estimate is that, for tax years beginning after 2017, less than five percent of taxpayers will itemize by filing Schedule A. The Indiana University School of Philanthropy and Independent Sector has estimated that the TCJA changes will reduce overall charitable giving by 1.7 percent to 4.6 percent. Those percentages convert to an annual reduction in giving between $4.9 billion and $13.1 billion.
Are there options to plan around the TCJA impacts on charitable giving? There might be, at least for some taxpayers. One approach is for a taxpayer to aggregate charitable gifts – make them in one year but not the following year, etc., so that there is a larger amount gifted in any particular year. This technique is designed to get the level of itemized deductions to an amount that is greater than the standard deduction for the years of the gifts.
If “gift stacking” won’t work for a taxpayer, other techniques may include gifting to private foundations, using charitable trusts or a donor advised fund. A donor advised fund allows a donor to make a charitable contribution, get an immediate tax deduction and then recommend grants from the fund to qualified charities. Of course, these various donation vehicles come with their own limitations on deductions and how they can operate. Likewise, there is no “one size fits all” when it comes to putting together a charitable giving plan. Some techniques just simply won’t work unless large gifts are made.
The TCJA made significant changes to the rules surrounding charitable giving. For many taxpayers, planning steps need to be taken to alter existing approaches to account for the new rules. Make sure to get good tax advice for your own situation. Also, when it comes to charitable giving, make sure to keep good records to substantiate your gifts. The IRS looks at the substantiation issue very closely.