Tax Cut and Jobs Act Complicates Charitable Giving
As a long-time board member of several Summit County non-profits, I am writing to express dismay over the effects the new tax law may have on charitable giving. But also to offer suggestions on how the philanthropically inclined can cope with the new regime and maintain their support for the organizations they cherish. And it may pay to act before year-end.
The House and Senate have merged their proposals into a conference report. Both houses are expected to vote this week and send the bill to the President for his signature by Christmas.
The legislation introduces three significant changes affecting charitable giving: eliminating personal exemptions, limiting many itemized deductions and raising the standard deduction – for taxpayers who don’t itemize – from $12,700 to $24,000 (for married taxpayers filing jointly.)
Currently, all taxpayers are entitled to a personal exemption of $4,050 for themselves, their spouse and each dependent. Potential itemized deductions (e.g., state and local taxes, mortgage interest, medical expenses in excess of 10% of Adjusted Gross Income (AGI), and charitable contributions) are then added; and if they exceed the standard deduction, you can itemize and lower your tax bill.
Under the bill, personal exemptions would be eliminated and rolled into the increased standard deduction. A couple who seeks to itemize will lose their $8,100 in exemptions and then have a hurdle of $24,000 to reach before it makes sense to itemize.
For example, in 2017, a couple might have AGI between $100,000 and $200,000 and the following deductions: $10,000 in mortgage interest, $10,000 in state income and property taxes and $4,000 in charitable contributions; bringing their total exemptions/deductions to $32,100. (The new law caps state and local income and property tax deductions (SALT) at a combined $10,000 – not nearly as big a problem in a moderate tax state like Colorado as it will be in New York and California.) On the surface, the law makes no change in the charitable contribution deduction.
But in 2018, because of the increased standard deduction, the same couple would have no incentive to itemize and would lose any tax benefit from the $4,000 in charitable contributions. Best estimates are that nationally the number of tax returns taking itemized deductions will be reduced from around 40 million to closer to 10 million. And charitable donations will be diminished by billions of dollars.
· Advance the charitable contributions you were considering making next year into 2017 – in order to obtain the current tax deduction.
· Consider starting a Donor Advised Fund with one of the major brokerage firms or your local community foundation. You’ll get a deduction in the year of the gift and can dole out distributions to your favorite charities in years you can’t itemize.
· Consider bunching your charitable contributions into alternating years in which you itemize and taking the standard deduction in between.
· Give highly appreciated stock or mutual funds and avoid capital gains.
· If you’re over 70 ½, take advantage of the direct IRA Qualified Charitable Distribution which allows you to shunt up to $100,000 of your annual required minimum distribution to charity. Effectively providing a charitable deduction even if you don’t itemize.
Of course, first consult your tax advisor regarding your individual circumstances.
Steven R. Smith, JD, CFP©, Frisco