United States: Make Your Charitable Contributions Count Under The Tax Cuts And Jobs Act

The Tax Cuts and Jobs Act (TCJA) will likely reduce the tax benefits of your charitable contributions. However, that does not mean you should stop giving or reduce the size of your gifts. After all, the availability of tax deductions is not the reason you give. However, it does affect the after-tax cost of charity. So, it is important to incorporate tax considerations into your charitable giving plan.

Price of charity

The after-tax cost of a charitable contribution is the amount of the gift less the tax savings from the charitable deduction. For example, Ian and Eileen, a married couple filing jointly, had $300,000 in taxable income in 2017. This placed them in the 33% tax bracket. If they donated $30,000 to charity in 2017 (and assuming they itemized their deductions), the after-tax cost of the donation would be $20,100. However, in 2018 the same amount of taxable income would place Ian and Eileen in the 24% bracket, so the after-tax cost of a $30,000 charitable contribution would increase to $22,800.

The TCJA also reduces the tax benefits of charitable giving by nearly doubling the standard deduction to $12,000 for single filers and $24,000 for joint filers and limiting itemized deductions. Under the law, the itemized deductions left are mortgage interest (now limited to interest on up to $750,000 in acquisition debt for newly-purchased homes), state and local taxes (capped at $10,000), medical expenses and charitable contributions. Because of these changes, a substantially greater number of taxpayers are likely to take the standard deduction, which provides no tax incentive for charitable giving.

One change that does boost the benefits of charitable giving for a limited number of taxpayers is a higher annual limit on gifts to public charities and certain foundations — from 50% to 60% of adjusted gross income (AGI). As before, other types of contributions are limited to 50%, 30% or 20% of AGI and disallowed contributions may be carried forward for up to five years.

Strategies to consider

Suppose you are a joint filer with $10,000-plus in state and local taxes, $7,500 in deductible mortgage interest, $5,000 in charitable contributions and no deductible medical expenses in 2018. Since these deductions total $22,500, you are better off taking the $24,000 standard deduction, so your charitable contributions generate no tax benefits. A potential strategy for increasing your tax benefits is to bunch your contributions into alternating years. For example, instead of contributing $5,000 per year to charity, you might contribute nothing this year and $10,000 next year. That way, you would take the standard deduction in 2018 and $27,500 in itemized deductions in 2019. This would increase your total deductions by $3,500 for the two-year period.

If you are 70-½ or older, another possible strategy is to make a qualified charitable distribution (QCD) from your IRA. The tax code permits you to transfer up to $100,000 per year tax-free directly from your IRA to a qualified charity and to apply that amount toward your required minimum distributions for the year. Because the distribution is not included in your income, you do not have to pay tax on the amount, and it lowers the odds that you will be affected by unfavorable adjusted gross income rules. If you itemize deductions, this may provide little or no additional benefit, but if you do not itemize, it is a powerful planning tool.

Review your plan

If you are philanthropically inclined, be sure to evaluate the impact of the TCJA on your charitable giving plan. If the act will substantially increase the cost of your charitable gifts, consider adjusting the size of your gifts or implementing strategies that will increase your charitable deductions.

Please note that legislation has been introduced in Congress that would allow taxpayers to deduct contributions, even if they do not itemize deductions. The proposed law would also eliminate the current caps on charitable contribution deductions. Please contact your tax advisor for information about the proposal and its current status.

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.