Cameron Casey, Ropes & Gray private client group partner, examines the various reforms included in the Tax Cuts and Jobs Act (TCJA) and how they may affect the federal tax benefits of charitable giving.
Among the sweeping changes included in the Tax Cuts and Jobs Act (TCJA) of 2017 are various reforms that may affect the federal tax benefits of charitable giving. While many of the revised provisions will expire at the end of 2025 (unless they're extended by future legislation), they have sparked vigorous debate about their potential impact on charitable giving in the near term.
The new tax law lowers individual income tax rates on ordinary income across the board, notably reducing the top marginal rate from 39.6% to 37%; and it generally expands the brackets so that more of a taxpayer's income is taxed at lower rates. The new law increases the standard deduction to $12,000 for unmarried individuals, $18,000 for heads of household and $24,000 for married individuals filing jointly. Those amounts are almost double what they have been in prior years, meaning that significantly fewer taxpayers will itemize their deductions.
Many taxpayers, particularly those who have mostly capital gain and qualified dividend income and who typically make larger charitable gifts, may not change the way they think about charitable giving as a result of the new law. But those people whose itemized deductions fall short of the standard deduction most likely will. They can make the most of their charitable giving by "bunching" it into one tax year, so that their deductions exceed the standard deduction in that year. Giving to a donor advised fund can be a great way to achieve this bunching effect. The initial, larger gift to the donor advised fund creates a larger deduction, allowing the taxpayer to itemize deductions in that year. The donor advised fund then serves as a charitable fund from which the taxpayer can recommend gifts to charity in subsequent years. There are no additional deductions as a result of those recommendations, so it doesn't matter that the taxpayer is taking the standard deduction in those years.
The new law maintains the benefits for charitable gifts of appreciated assets that a donor has owned for more than one year. A donor is generally entitled to an income tax charitable deduction for the full fair market value of such a gift. The charity can then sell the appreciated assets, without incurring a capital gains tax, and use 100% of the proceeds to further its charitable mission. For donors who itemize, the gift of appreciated assets will generate an income tax charitable deduction.
For taxpayers who have reached the age of 70 ½ and who have IRAs, a special opportunity exists. IRA owners in this category continue to have the ability to request a distribution of up to $100,000 per year directly from their IRAs to charity. This "qualified charitable distribution" does not generate a deduction for the IRA owner, so it doesn't matter whether she itemizes deductions or not. Instead, the qualified charitable distribution is excluded from the IRA owner's taxable income altogether. A qualified charitable distribution can even be used to satisfy the required minimum distribution that an IRA owner of this age must take every year.
The new tax law may change how and when people donate to charity. Some people will surely contribute less as a result of the increase in the standard deduction. I am less pessimistic than some, though, about the new tax law's overall dampening effect on giving. In the end, I think people will continue to give—perhaps using strategies like the ones we've discussed—primarily because they believe in the mission of the charities they're supporting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.