At the Southwestern Planned Giving Council meeting on Tuesday November 13, 2018, I reported on the need for year-end tax planning in light of passage of the Tax Cuts and Jobs Act (“TCJA”) in 2017.
With the TCJA changes, most advisors think there should be a change in mindset in year-end charitable giving. The primary driver of the change is the increase in the standard deduction.
While many in the nonprofit community view the increase in the standard deduction as an impediment to charitable giving, there are other changes in the TCJA which should encourage more charitable giving. The positive changes in the TCJA include:
· Elimination of the Pease limitation, which acted to reduce itemized deductions by 3% of excess adjusted gross income for high income taxpayers.
· TCJA increased the limitation on charitable giving from 50% to 60% of adjusted gross income. Also, the 5-year carry forward of excess deductions, and the deduction of appreciated securities up to 30% of adjusted gross income, are still available after passage of the TCJA.
· The alternative minimum tax (“AMT”) is still the law, but it is less likely to apply because the exemption amounts have been raised and are permanently indexed for inflation. It is still critical for high net worth taxpayers to consider AMT.
Given the increase in the standard deduction and the other TCJA changes, some strategies to continue making tax-efficient charitable donations include the following:
1. Bunching. With the increased standard deduction to $24,000 for married filing joint ($12,000 for single taxpayers), one strategy is to accelerate charitable donations into a certain year in order to exceed the standard deduction. Bunching can be done by simply making additional contributions to charity in one tax year (i.e., writing a check).
Other more sophisticated ways of bunching include the establishment of a donor advised fund (“DAF”), or a private foundation. Both a DAF and a private foundation allow charitable deductions in one year, and contributions to charity to be spread over future years. Another way of bunching is to make a planned gift with a large up-front deduction, including a charitable remainder trust, pooled income fund, life estate, or charitable gift annuity.
2. The IRA Charitable Rollover. For any donor age 70 ½ or more that has an individual retirement account (“IRA”), the IRA Charitable Rollover, technically called a qualifying charitable distribution (or “QCD”), is the way, truth and life. There is almost no reason why required minimum distributions from IRAs should not be made as IRA Charitable Rollovers, if the donor has any charitable intent and intends to make a charitable donation. An IRA Charitable Rollover is even better than an itemized deduction because it is distributed directly to charity and does not enter into the donor’s adjusted gross income.
3. Offset a high income taxable year. Certain taxpayers may have a year when their income, for some reason, puts them in the highest tax bracket, or a higher than usual tax bracket. For example, a taxpayer in the 37% tax bracket (which starts at income of $600,001) would be better off by contributing to charity in such a high tax year than in another tax year when they are in a 24% bracket.
4. Donate long-term appreciated securities. This is a time-tested strategy that has been around for many years, and is still valuable after TCJA. This technique involves donating appreciated stock or securities at full fair market value, and avoiding long term capital gains taxes. Again, with the increased standard deduction amounts, it is important to plan when such donations are made to ensure their full deductibility.
With the TCJA changes, it is more important than ever for charities to engage in charitable year-end tax planning with their donors. Also, it is important for donors to work with their tax and financial advisors to insure that the tax changes in the TCJA have been considered.
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Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.
We would be pleased to address any questions you may have regarding the foregoing or any other tax-exempt issues. For further information, please contact Jim Conley (412-765-0535), [email protected]; Susan Ott (412-745-9900), [email protected]; or Jack Owen (412-765-1020), [email protected]