The Tax Cuts and Jobs Act (TCJA) changed many sections of the Internal Revenue Code. One of those areas impacted by changes in the TCJA is charitable giving. Some taxpayers may be unaware of these changes and others may be wondering whether or not charitable giving still makes sense, looking at it strictly from a tax benefit standpoint.

There was a rather large increase in the standard deduction under the new TCJA. For married couples the standard deduction went from $12,700 in 2017 up to $24,000 in 2018. Due to this large increase, more individuals are now taking the standard deduction instead of itemizing.  Upon taking the standard deduction, taxpayers are no longer getting a tax benefit from their charitable donations.

Another major impact of the TCJA was a lowering of the income tax brackets and rates. The decrease in the tax rates actually devalued the charitable donations deduction, along with many other deductions. If a taxpayer was in the 33% bracket in 2017 and they made a $2,000 donation, it would have a tax benefit of $660.  This would have given the taxpayer a true cost of $1,340 (the $2,000 donation - $660 tax benefit). However, in 2018 under the new lower tax rates, that same taxpayer may fall in the 24% tax bracket.  So, in 2018, that same $2,000 donation would only give a tax benefit of $480, with a true cost of $1,520 (the $2,000 donation - $480 tax benefit).  One strategy to circumvent this would be to bunch donations every few years in order to maximize itemized deductions, especially when the standard deduction is used in the years not itemizing. The use of donor advised funds can be an important part of this strategy, allowing a large upfront charitable tax deduction, while the money itself is spread to various charities over a number of years.

While the increase in the standard deduction makes it more challenging for individuals to receive a tax benefit from making charitable donations, individuals who are over 70 1/2 years old have an alternative way of benefiting. Individuals who have to take mandatory required minimum distributions RMD’s from their retirement accounts can make a portion of their distribution a Qualified Charitable Distribution (QCD) up to $100,000 per year per person. Good news is the QCD amount counts toward your RMD amounts for the year.  For example, if you are required to take a $50,000 RMD for the year, but decided that you want to donate $25,000 as a QCD, only $25,000 is taxed as a normal retirement distribution ($50,000 RMD - $25,000 QCD). This method allows you to donate to charitable organizations and lower your taxable income, without having to worry about the itemized deduction hurdle.

Taxpayers may still consider making donations of appreciated marketable securities. For example, if you bought a stock at $1,000 and were going to donate it today when its fair market value is $5,000, you would receive a charitable contribution of the current fair market value of $5,000. Taxpayers are able to avoid paying the capital gains tax on the appreciated value of the stock because they are not the one selling the stock, the charitable organization is.  If the stock that you want to donate has lost value since it was purchased, it is usually more beneficial to sell the stock first, taking a capital loss on your personal tax return.  Then donate the money received from the stock sale. 

For estates looking to make donations which are deductible from a decedent’s estate, charitable bequests can be made. However, the current estate tax exemption is set at $11.4 million dollars. With such a high threshold, only a few individuals will now owe federal estate taxes. With such a high estate exemption amount, people who plan on making donations may want to consider making them during their lifetime either as an itemized deduction if their tax situation allows it, or as a QCD.

For pass-through entities (Partnerships and S-corporations), the TCJA did not change much for charitable donations. This is due to the fact that charitable donations made by pass-through entities are reported on the owner’s personal income tax returns. Those donations will be subject to the owner’s personal itemized deductions. If the owners are married and do no not have more than $24,000 in itemized deductions, there will be no benefit from any charitable donations. However, a C Corporation can still deduct donations up to 10% of its income. This, paired with the new 21% flat corporate tax rate, can help C Corporations lower their tax burden.

There are a few other ideas beyond the scope of this article.  These include the use of charitable remainder trusts, charitable lead trusts, and charitable gift annuities.  Most of these are funded with large sums of cash, allowing large charitable contributions that will be deducted as itemized deductions.  Another attractive benefit of the charitable remainder trusts and charitable gift annuities are the income streams the donors may receive for life after funding them.

If you have any questions or concerns about making charitable donations, please do not hesitate to contact your Dermody, Burke & Brown advisor.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.