Maximizing Charitable Deductions Under the Tax Cuts and Jobs Act
By Patrick S. Flanagan, CPA
People overwhelmingly donate money, goods, and time to charities because they believe in each organization’s cause. Despite our natural altruistic tendencies, Congress began offering additional tax incentives to make donations in 1917 as there was a concern that charities would collapse during World War I. The law surrounding charitable contributions has changed numerous times in the subsequent years, but the tax benefits remain in 2018 and beyond.
As we approach the end of the year when many people increase their charitable spending, it is important to consider how tax benefits have changed under the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. Simplification was a primary goal of the new tax law, and while many professionals would argue that this is the most complicated tax law since 1986, everyone can agree that itemized deductions have been simplified for most individuals.
Under the Tax Cuts and Jobs Act, the standard deduction increases to $24,000 for a married couple filing a joint return, $18,000 for head of household, and $12,000 for other individuals. Taxpayers who are itemizing will only be able to deduct up to $10,000 of combined state, local, and property taxes. Further, taxpayers will no longer be able to claim miscellaneous itemized deductions such as investment management fees and unreimbursed employee expenses. Consequently, many taxpayers who have itemized deductions in the past will now utilize the standard deduction. Though these taxpayers may have a natural desire to donate to charitable organizations, they will lose the tax benefit of these donations if they are claiming the standard deduction. To maximize tax benefits while providing to charity, taxpayers should consider the following strategies:
- Consolidate charitable contributions to give more in a single year rather than spreading contributions over two to three years. For example, rather than donating $2,000 per year, give $6,000 in year 1, minimize donations in years 2-3, and then repeat this process with a large donation in year 4. This will increase the likelihood of claiming itemized deductions in the years of large donations while claiming the standard deduction in the intervening years with minimal donations.
- If taxpayers are concerned that charities will not be able to properly manage funds received up front for multiple years, consider making contributions to a donor advised fund. This is similar to consolidating contributions as a taxpayer will still recognize a large deduction in the year of contribution; however, unlike the method above, taxpayers can work with their donor advised funds to determine the timing and amount of distributions from the fund to their selected charities. This allows taxpayers to receive a tax deduction in year 1 while still ensuring cash is sent to charities over multiple years.
- Consider donating highly appreciated assets, such as publicly traded securities, directly to charities. This allows taxpayers to avoid capital gain recognition on the disposal of the securities while also claiming a charitable deduction. Securities donations tend to be larger than cash donations, which increases the likelihood that taxpayers will be able to itemize deductions when employing this strategy. Further, taxpayers can donate securities to a donor advised fund and still direct the flow of cash to their designated charities over time. Keep in mind that donations of appreciated property are still capped at 30% of adjusted gross income and that closely held stock in excess of $10,000 requires an independent appraisal.
- For taxpayers over 70.5 years old, consider making a qualified charitable distribution directly from a traditional IRA. Rather than increasing the likelihood of itemizing deductions, this method allows taxpayers to directly reduce their income from what would have otherwise been taxable IRA distributions. As an added benefit, a qualified charitable distribution can satisfy all or a portion of a taxpayer’s required minimum distribution. Just remember that the qualified charitable distribution limit is $100,000 and cannot be paid to a donor advised fund as described above.
The main theme in maximizing charitable deductions under the Tax Cuts and Jobs Act is to group donations into a single year so that the taxpayer is more likely to exceed the increased standard deduction threshold in that year and claim itemized deductions. To further encourage donations, the new tax law increased the deductible threshold for cash donations to public charities from 50% of adjusted gross income to 60%. Be mindful, though, that donations to college athletics to secure benefits such as season tickets are no longer deductible.
The tax benefits from charitable contributions will always come second to basic generosity, but this is certainly a situation where individuals can have their cake and eat it too. If you have any questions, we encourage you to reach out to your trusted advisors to help navigate how the Tax Cuts and Jobs Act impacts you.