Tax Reform's Impact on Charitable ContributionsBy Magdalena M. Czerniawski | Robert Lyons | December 20, 2018
Almost a year ago, the Tax Cuts and Jobs Act (TCJA) brought major tax reform to individuals, for-profit businesses and not-for-profit entities. Among the Act’s provisions were several modifications that affect charitable giving. The most far-reaching provision in the new law is the doubling of the standard deduction amount available to taxpayers starting in 2018. The standard deduction is the amount that a taxpayer can use to reduce his/her taxable income each year. The amounts vary depending on marital and filing status.
Alternatively, if a taxpayer has certain expenses, they can itemize their deductions. This means that for certain types of expenses, such as mortgage interest, real estate taxes (with certain limitations) and charitable donations, both cash and non-cash, the taxpayer can deduct the actual amount paid if it was over the standard deduction limit. For some taxpayers, charita- ble deductions are the items that put them over the threshold, and therefore, they realize direct tax benefit from their charitable giving.
The increase in standard deduction from $6,350 in 2017 to $12,000 in 2018 for individuals and from $12,700 in 2017 to $24,000 in 2018 for married couples filing jointly certainly changes the charitable giving landscape. However, this does not affect wealthy individuals who are generally way above the $12,000 or $24,000 limit. If a taxpayer lives in the New York Metro area and owns a home, chances are that the property taxes are above $10,000 and, combined with mortgage interest, it would be relatively easy to go above the standard deduction threshold. Therefore, the amount of charitable giving with the increased threshold can have a positive impact on the amount of tax liability for the year. For non-homeowners, chances are they were using the standard deduction before and will continue to do so going forward.
A LOOK ON THE BRIGHT SIDE
The National Council of Nonprofits estimated back in April 2018 that this legislative change will decrease charitable giving by about $13 billion. While that figure sounds startling, it should not be cause for panic. In 2017, according to Giving USA, Americans donated over $400 billion to various charities, which is only 5 percent higher than the prior year. About $290 billion was given by individuals. While the report for 2018 isn’t available yet, the amount will probably be below the $400 billion mark. However, this may be due to the fact that many individuals donated prior to the 2017 year-end to get the benefit of the old law. That does not change the amount given, but rather the timing of giving.
Furthermore, remember that charitable giving is an important aspect of American life. While tax savings are certainly a great motivator for charitable giving, most people donate to charities because they believe in the cause and want to make an impact. With the digital age, organizations also have a much easier way to solicit donations. With the use of websites and social media, it is much easier to spread the word about the impact charities have than it used to be. Most organizations also accept donations through their website, which makes it even easier to donate. In addition, many organizations post their governing, tax and financial documents online to create even more transparency and accountability.
CONSIDERATIONS FOR DONORS
When discussing 2018 charitable contributions with your donors, there are a few things you can advise them to keep in mind if they are concerned about the impact of the new tax law. Publication 526 Charitable Contributions provides detailed rules about giving, but the ones generating the biggest tax savings are listed below.
- Qualified Charities – Generally, cash donations to qualified charities, which are typically public charities, can be deducted up to 60 percent of the taxpayer’s Adjusted Gross Income (“AGI”). This is up from 50 percent under the old law. Contributions to organizations other than qualified charities have a lower limit, which was not changed by the TCJA. Generally, donations other than cash to qualified organizations can be deducted at fair market value of the property. There are additional limitations on non-cash contributions that can be found in Publication 526.
- Appreciated Property – Donations of appreciated property can further save tax dollars. For example, if a donor has appreciated stock, he/she could sell the stock, donate cash to a qualified charity and get a 60 percent charitable deduction for the cash donation. However, the donor would have to pay tax on the capital gain generated from the sale of that stock. If he/she donates the stock to charity instead, the deduction will be subject to the 30 percent AGI limitation, but it will be at the fair market value amount and not subject to capital gains tax. Alternatively, if the donor’s basis is high enough, he/she can use that instead of the fair market value amount and be subject to the higher 50 percent AGI limitation. Either way, not paying capital gains tax saves tax dollars.
- Investment Retirement Accounts – There is also a provision in the TCJA that allows taxpayers to donate to a qualified charity from their Investment Retirement Accounts (IRAs). This is called qualified charitable distribution and is another great way to save tax dollars, as the amount donated to charity doesn’t count as income for the taxpayer. It does, however, count toward the individual’s required distribution amount for the year. A taxpayer can transfer up to $100,000 to charities tax-free. If the minimum distribution is $60,000, he/she can take that amount and direct it to go to a qualified charity instead of including it in income. The donor won’t be liable for income tax and will satisfy his/her charitable donation wishes. In addition, there is no limit on how many donations can be made, so donors can donate to many qualified charities or few, depending on preference.
In conclusion, the change in tax law should have small impact on charitable giving as most donors are motivated by a cause and not tax deduction. Certainly, deduction helps, but it is not the main reason. In addition, there are many tax planning strategies that can maximize donors’ tax savings under the new tax law. Educating yourself on these issues and encouraging your donors to make their donations before year-end can help position your organization for a smooth transition to the new charitable giving landscape.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Tax Director at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With nearly 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +
About Robert Lyons
Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +