An important feature of the 2017 Tax Act is the increase in the standard deduction, a change that will have a far-reaching effect on charitable giving.
Charities remind us that gifts to them are tax-deductible – but in practice, there is no tax deduction unless the donor has itemized deductions exceeding the standard deduction. The 2017 Tax Act increased the standard deduction from $6,350 for individuals and $12,700 for a married couple filing jointly, to $12,000 for individuals and $24,000 for a married couple filing jointly.
Further, the 2017 Tax Act limited the deduction for state and local taxes to $10,000 ($5,000 in the case of a married individual filing a separate return), effectively eviscerating a deduction that has long been important for taxpayers in Delaware, Pennsylvania, New Jersey and Maryland.
Together, these changes will greatly reduce the number of taxpayers who can itemize in 2018, and impair the incentive for charitable giving.
Charitably-minded taxpayers should not, however, assume that tax benefits for their generosity will be beyond their reach. Rather, they will need to adjust their giving habits, to continue to enjoy a tax benefit for their generosity.
One option is to stagger the years in which they make significant charitable gifts, by making larger gifts in alternating years. For example, if a family has annually given $2,000 to its house of worship or alma mater, it should now consider making no donation this year, and a $4,000 gift next year. This could enable the family to take advantage of the increased standard deduction this year, and enjoy an itemized deduction in excess of the standard deduction next year.
Another option is to establish a donor advised fund, a philanthropic vehicle which enables taxpayers to enjoy the full deduction of their gift immediately, even though the charity may not receive the funds until later. A taxpayer can easily establish such a funds at a major financial institution. A taxpayer receives an immediate income tax deduction on contributing assets to the fund. If the assets are appreciated securities, the donor receives a deduction for the full value, without incurring a capital gain. The donor-advised fund holds the donation, and in due time thereafter, the donor can recommend that the fund distribute specified amounts to identified charities. If the donor’s recommendation is approved – which in practice inevitably occurs if the organization continues to be a recognized charitable organization – the fund makes the distribution, and the donee organization is made aware of the donor’s identity. Such funds, whose structure has been approved by the IRS, require the filing of no additional tax return (unlike a private foundation). The ease of use has made such funds popular; the new tax law has only increased their popularity.
A third option, unchanged by the 2017 Tax Act, is making gifts through trusts that are designed to benefit both a charity and the family, either through charitable lead trusts or charitable remainder trusts. These vehicles can enable a taxpayer to achieve charitable goals while maintaining control over the assets.
There remain many options for taxpayers to be charitably active in a tax efficient manner, it just requires some additional forethought and planning. That planning may consist simply of setting money aside each year and making charitable gifts every other, or every few years. Or, alternatively, that planning may be more robust and comprehensive, such as to be a part of multi-year financial plan, or even an estate plan.