Tax Cuts and Jobs Act and Your Client’s Philanthropy
On December 22, 2017, the President signed into law what is popularly known as the Tax Cuts and Jobs Act. There has been discussion in the popular press on the effect these tax changes will have on charitable giving. For many of your clients, it’s likely very little has changed that will affect their giving. There are still a number of tax-efficient ways of giving after the recent tax law changes.
What Is in the New Tax Law that Affects the Charitable Sector?
Increase in the standard deduction. The law eliminates the personal exemption and increases the standard deduction to $12,000 for singles, $24,000 for married couples filing jointly, and $18,000 for heads of households. The net effect of doubling the standard deduction is to eliminate itemizers except for higher income clients. Read below for tax-efficient ways of charitable giving after the recent tax changes.
The income tax charitable deduction. The income tax charitable deduction was retained in the Tax Act. Other itemized deductions are eliminated or subject to limitations. State and local taxes will be deductible only up to a combined annual limit of $10,000. Deductions for mortgage interest, for mortgages incurred after 2017, will be limited to interest on up to $750,000 of debt for those married filing jointly, down from $1 million.
Increase in the adjusted gross income limitation on cash gifts. There is an increase in the adjusted gross income (AGI) limitation on charitable gifts of cash to public charities from 50% of AGI to 60% of AGI. The AGI limitation on charitable gifts of appreciated property to public charities remains at 30% of AGI. The five-year carry forward for unused deductions remains.
Repeal of charitable deduction for college athletic event seating rights. The law repeals the 80% charitable deduction for gifts made in exchange for college athletic event seating rights. It remains to be seen if this change in the law will have a material impact on support for athletics programs.
Repeal of 3% deduction reduction rule ("Pease" limitation). The law repeals the "Pease" limitation, which reduced your client’s itemized deductions by 3% of the amount by which their adjusted gross income exceeded the applicable threshold. This limitation could reduce itemized deductions up to 80%. For high income clients who still itemize their deductions, and most high-income clients will, the benefit of their charitable deductions will be more assured without the Pease limitation to worry about.
Tax-Efficient Ways to Make Gifts Under the New Tax Law
Fewer clients will enjoy the tax benefit of itemizing their income tax charitable deductions beginning in 2018. Tax benefits can influence the size and timing of a gift, nonetheless, the primary impetus for charitable giving will continue to be your client’s affinity for the work of the American Red Cross.
Gifts of Appreciated Property The run up in the stock market to record levels has left many of your clients with securities that have appreciated significantly. If your client itemizes in 2018 and beyond, they receive a double tax benefit of a fair market value income tax charitable deduction and complete avoidance of capital gain income on gifts of long-term appreciated property. Even if your client doesn’t itemize, avoiding capital gain tax by giving long-term appreciated assets may still be the most tax efficient way to give.
Charitable IRA Rollovers (Qualified Charitable Distributions) If your client is over 70 ½ they can make a direct transfer from a traditional IRA or Roth IRA of up to $100,000 per year to the American Red Cross. This qualified charitable distribution is described in IRC 408(d)(8) and is popularly referred to as a charitable IRA rollover. The rollover to charity counts toward satisfying your client’s required minimum distribution and is not included as income. The taxpayer avoids all income tax on the withdrawal, even if they don’t itemize after the new tax law. The net effect of making a charitable IRA rollover gift is to offer the same tax benefit as clients who still itemize their deductions.
Remember your client must strictly follow the rules to make a qualified charitable distribution from their IRA. Here is a checklist to follow:
- Donor must have attained the age of 70½ at the time of the gift. It is not enough to have attained 70½ in the year the rollover is made.
- The total amount that an individual taxpayer can make in charitable IRA rollover gifts in any year is limited to $100,000.
- The IRA administrator must make the rollover distribution directly to the charity. If the donor takes a distribution and then makes a gift, that does not qualify.
- The donor can receive no benefit in exchange for the rollover gift, so only outright gifts to public charities qualify. No life income gifts. The gift also cannot go to a donor advised fund or supporting organization. It can be used to fulfill a pledge, however.
- The donor is not entitled to an income tax charitable deduction for a charitable IRA rollover. The donor never paid tax on the IRA money and it will not be included as income on the donor’s tax return, so there is no offsetting tax deduction.
Make larger gifts to charity Some of your clients, especially those who live in high tax states, may find their total deductions put them close to the threshold where itemizing deductions offers greater tax benefits than taking the new higher standard exemption. In such cases, it might be advantageous to make larger charitable gifts to increase their itemized deductions. Particularly if your client has an outstanding pledge to the American Red Cross, they might consider accelerating some of their pledge payments so that they can enjoy the additional tax savings that itemizing would offer.
Bequest and Beneficiary Designations. If your client is in retirement they may be concerned about outliving their resources. These fears discourage them from considering large current gifts to the American Red Cross. Encourage these clients to consider a gift from their estate or living trust. They can retain control and access to their assets until their death.
Because of the income tax burden on IRAs at death, many of our donors are adding the American Red Cross as a beneficiary of their IRA. A beneficiary designation can be for all or part of the balance remaining in the IRA. All they need to do is complete a change of beneficiary designation form. Enter our full legal name, “American National Red Cross”, our tax identification number 53-0196605, and the percentage of their IRA your client would like to leave to us.
Split-Interest Gifts. The new tax law made no changes to split-interest gifts such as charitable gift annuities, charitable remainder trusts, charitable lead trusts, and pooled income funds. The life-income gifts such as gift annuities and charitable remainder trusts offer substantial tax and income benefits. Both vehicles generate an income tax charitable deduction, eliminate or reduce capital gain tax, and can increase cash flow for those concerned about reliable income in retirement.
The non-grantor charitable lead trust offers substantial opportunities for saving gift and estate taxes. Some of your clients are still concerned about transfer taxes even after the doubling of the estate and gift tax exemptions. If your client would like to make a gift to the American Red Cross and pass assets to heirs at reduced gift and estate tax cost, consider a non-grantor charitable lead trust.
A little used variation on the lead trust, the grantor lead trust, can offer significant income tax savings. Your client may experience a cash event such as the sale of a business or distribution of significant deferred compensation for example. The grantor lead trust offers the opportunity for a significant income tax charitable deduction, gifts to the American Red Cross for a period your client specifies and return of their principal at the end of the trust term.
It is difficult to predict with precision how the new tax law will affect philanthropy and planned giving. The doubling of the standard deduction may give pause to some clients who no longer itemize. Your client’s generosity to the American Red Cross is driven by the emotional connection they have with our organization. The American Red Cross is an expression of your client’s values and concerns. Tax policy can influence philanthropic behavior, but taxes don’t drive the philanthropic impulse.