Charitable Gifting Under TCJA

By: AnnaMarie Mock, CFP®

With the recent changes made through the Tax Cuts and Job Act (TCJA) of 2017, there has been a concern by many charitable organizations that people’s philanthropic nature will be stunted going forward.

The 2016 U.S. Trust Study of High Net Worth Philanthropy, conducted by U.S. Trust in partnership with the Indiana University Lilly Family School of Philanthropy, explored the charitable practices of high net worth individuals. According to the findings, the primary motivation to donate was the belief in the charity’s mission, as indicated by 54.1% of respondents. Positive impact of the donation and personal satisfaction ranked second and third by those surveyed as reasons for charitable giving. Receiving a tax deduction came in 4th place with 18% of the responses. However, when the question was posed differently asking if their charitable gifting would change based on tax deductibility, 50.4% of high-net-worth individuals indicated that their charitable contributions would decrease. The Council on Foundations estimates that the new tax law will decrease charitable giving in the US by $16 billion to $24 billion annually.

How can TCJA affect charitable gifting?
The new law doubles the standard deduction for married filing jointly to $24,000 and $12,000 for single filers while repealing the opportunity to use some additional deductions. With these changes, it may not be feasible for some taxpayers to itemize their deductions; taxpayers can only deduct charitable contributions when they itemize. The Tax Policy Center estimates in 2018 the number of taxpayers that itemize would decrease by 60% from 46.5 million in 2017 to 19.3 million.

Example 1:
A married couple has $23,000 in total deductions comprised of state and property tax, mortgage interest, and charitable donations. In 2017, the couple would have itemized their deductions for their tax return because $23,000 of itemized deductions was higher than the standard deduction of $12,000.  Under TCJA, if their deductions remained constant at $23,000, they would take the standard deduction of $24,000. Therefore, the tax benefit of the annual charitable contribution of $5,000 would be eliminated under TCJA. As discovered in The 2016 U.S. Trust Study of High Net Worth Philanthropy, this lack of deductibility may diminish the motivation to make charitable donations.

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Are there any solutions?
There are alternatives and strategies available to incentivize taxpayers to remain philanthropic and capture the maximum tax deduction available. Some taxpayers may be able to manage the loss of ability to itemize each year by “bunching” donations across several years into one year’s contribution and then itemizing for that “bunched” contribution year. This technique can be done by simply contributing cash or securities outright. What would the charity receive in the alternate “non-bunched” years?

A Donor Advised Fund, or DAF, is an investment vehicle that is consistent with the design of the “bunching” method. A DAF allows you to make a charitable contribution to the DAF and receive an immediate tax deduction. The funds can then be invested and used to make grants to qualified charities and nonprofit organizations at any point in time.

Example 2:
If the same married couple used the “bunching” method, they would be able to itemize their deductions two out of six years. In the First and Fourth Years, they would contribute $15,000 to the DAF, which is three years’ worth of contributions. Each year, they would gift $5,000 to the charity of their choice from the DAF. Under this strategy, the couple would itemize to take full advantage of the charitable deduction in the First and Fourth Years, but take the standard deduction in the other years. Like in Example 1, the charity is still receiving $5,000 per year ($30,000 total), but the married couple can take advantage of the two years where their deductions are above the standard limit.

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This may be a bit presumptuous to say this will occur because of the new tax law. It may take several years to determine the effect of TCJA on donations, and there may even be amendments which could change the tax landscape. However, it is important to be aware of tax efficient techniques available in the short term. If you have any questions related to TCJA or DAFs, please do not hesitate to reach out to the HIGHLAND team.