Impact of Tax Reform on Charitable Giving Opportunities

While tax reform, commonly known as the Tax Cuts and Jobs Act of 2017, contains few provisions that directly impact charitable giving, there are a number of changes that may have an indirect impact on the deductibility of charitable gifts.

Increased Deductibility Limit

Through December 31, 2017, cash gifts were limited to 50% of a donor’s adjusted gross income (AGI)—although any amount over the limit could be carried forward five years. As of January 1, 2018, that limit has increased to 60% of AGI.

This change is only effective for cash donations. People who donate appreciated property, such as stock with low basis and high capital gains, must still abide by the 30% of AGI limitation. Even with the increased AGI limitation for cash donations, gifting appreciated property may remain the most tax-efficient means of giving.

Tax Rate and Deduction Changes

Many taxpayers will see a decrease in their federal marginal tax rates, which, in theory, means a corresponding decrease in the tax advantage of a deductible charitable gift.

However, taxpayers could see their federal taxable income increase because of the new federal limitation on deductibility of state, local, and property taxes exceeding $10,000. Accordingly, for states that allow charitable deductions—such as California—increasing charitable giving could be more beneficial in the current year compared to prior years because the federal benefit for state taxes is now significantly limited.

Athletic Event Deductions

Through the end of 2017, donors who received athletic-event seating rights from colleges and universities in exchange for a gift could deduct 80% of their gift. The new tax reform law repeals this 80–20 split. However, it doesn’t affect laws relating to charitable contributions and quid pro quo rules that allow a donor to take a tax deduction for payments made in excess of return benefits received—as long as there’s charitable intent.

To learn more, read our Insight, which goes in-depth on this topic.

Pease Limitation Eliminated

The Pease Limitation was a limit on miscellaneous itemized deductions—such as charitable gifts—that applied to AGI over $261,500 for single filers and $313,800 for married-filing-jointly taxpayers.

This limitation was eliminated in the tax reform bill, which means donors at higher income levels may now be able to deduct more of their charitable giving.

Increased Estate-Tax Exemption

The lifetime estate-tax exemption has increased to a projected $11.2 million in 2018 from $5.49 million in 2017, which could considerably impact individual taxpayers’ estate and charitable plans.

Example

A taxpayer’s net worth is $10 million. Her will states she will leave assets in the amount of the estate-tax exemption in a trust for her heirs and the remainder to charity.

Under the previous exemption amount, she’d have left roughly $4.5 million to charity. Under the new exemption amount, the entire amount of the estate would go into trust with no remainder going to charity. This could come as an unpleasant surprise to a taxpayer who wants charity to receive assets from the estate.

Increased Standard Deduction

The standard deduction has increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married-filing-jointly taxpayers. With this change, many people who previously chose to itemize deductions—including charitable gifts—will no longer benefit from doing so.

Qualified Charitable Distribution

Taxpayers who are at least 70.5 years old and receive required minimum distributions from their IRA have the option to make a qualified charitable distribution (QCD) of up to $100,000 from their IRA.

A QCD allows individuals to gift directly from their IRA to a qualified charity. Although the taxpayer won’t receive a charitable deduction, they also won’t have to recognize the QCD as income.

Grouping Charitable Giving

It’s possible to group several years’ worth of giving into one year. For example, an individual who typically donates $10,000 each year to charity may no longer be able to itemize his charitable giving. By donating two or three years’ worth of giving at once, he would have $20,000 to $30,000 in charitable giving and would likely be able to itemize.

Taxpayers who prefer not to give that much to a charity at one time could donate the lump sum into a donor-advised fund (DAF). They could then direct the DAF to distribute to the charity over the course of several years.

We’re Here to Help

To find out more about how tax reform may impact your plans for charitable giving, contact your Moss Adams professional.