The Tax Cuts and Jobs Act of 2017 simplifies the tax code in some ways, but also adds additional complexity, especially when it comes to charitable giving.
How will the tax overhaul impact your generosity?
It depends. Below are some of the important changes and ways you can continue to give while reaping some tax relief for opening your wallet.
Much of the tax code has changed for taxpayers, including a doubling of the standard deduction to $12,000 from $6,500 for singles ($24,000 from $13,000 for couples filing jointly). Prior to the new tax laws, you would begin getting deduction credit for giving if your total deductions exceeded the $6,500 for singles ($13,000 for couples filing jointly).
Today, there is a higher hurdle to surpass, suggesting that your ability to claim the charitable contribution deduction may depend on whether you are eligible to itemize at all. In general, you would choose to itemize deductions if the eligible expenses you tracked over the year in hopes of getting a tax break exceed the standard deduction levels. Otherwise, you would take the standard deduction because it is more advantageous.
Why does it matter?
Historically, the individual income tax deduction for charitable giving has provided an incentive to give by reducing the opportunity cost of donating to your favorite cause. According to The Tax Policy Center (“TPC”), charitable giving by individuals in 2017 is estimated to reach $292 billion.
The recent tax overhaul lowers individual income tax rates, thus reducing the value of all tax deductions and leaving some experts to fear that changes to the tax code will dramatically reduce the incentive to give. According to the Tax Policy Center, this will in 2018, raising the after-tax cost of donating by about 7 percent. TPC estimates that the number of will fall 57% from about 37 million to 16 million in 2018 as a result.
What can you do?
You might be wondering how you can continue your charitable giving and reap some tax benefits. If you qualify for itemization based on your level of deductible expenses, you are more likely to be able to claim charitable contributions like you would normally. For those who are unable to itemize or for those who wish to give a bit more, there are several strategies to help.
Donor Advised Funds
A donor-advised fund (DAF) is a charitable investment vehicle, designed for giving money to charities. It offers a simple, private and relatively low-cost way to structure your giving legacy. Some advantages of a DAF include immediate tax deductibility of gifts and a wider range of assets that can be gifted, including non-cash assets such as real estate, private equity, and even bitcoin.
Still, your tax deduction depends on what you choose to donate. Cash gifted through a DAF is now deductible up to 60% of adjusted gross income (up from 50%); If you donate long-term appreciated assets, such as stocks, bonds or real estate, your deduction is up to 30% of income, which is unchanged from last year. DAF’s are fairly straightforward to set up with the help of a financial institution, but one consideration is cost. DAF fees can range, so it’s important to speak to your financial advisor for a full disclosure of the ongoing costs of this method.
Gift Highly Appreciated Stock Instead of Cash
While the deductibility of cash gifts has been increased to 60% of adjusted gross income from 50% under the new tax laws, giving the philanthropic an extra boost for their giving, donating long-term appreciated assets might still get you the best tax outcome. Gifting highly appreciated stock is beneficial because it not only gives taxpayers an immediate tax deduction for the full market value of the stock, but it also bypasses the capital gains tax that would have otherwise been owed if you instead cashed in the stocks to gift. Get the most out of this approach by gifting the stocks with the lowest basis or original cost.
Charitable Remainder Trusts
A Charitable Remainder Trust (CRT) is a tax-exempt trust structured to help reduce the taxable income of individuals by passing income to beneficiaries of the trust for a pre-determined period of time and then gifting the rest of the trust to the charity of your choice. It reduces the grantor’s income taxes and allows for a tax deduction now, while also reducing estate taxes when you die. Tax deduction percentages generally mirror that of the DAF, but it’s important to consult your financial and tax advisors to discuss your specific situation and costs to establish a CRT.
Make Your Favorite Charity A Beneficiary
A simpler way to ensure you’re able to give to your favorite charity could also be to name it as a beneficiary of your retirement accounts. This is typically achieved by contacting your charity of choice and requesting instructions for naming it as a beneficiary. While there is no immediate tax deduction for this strategy, you do get the chance to sleep at night knowing you will still be able to help your charitable organization after death. It’s important to keep in mind that your retirement account servicer might not have a system of informing your charity of unforeseen circumstances. You may need to inform an executor of your estate or someone you trust to notify your beneficiary charity upon your death.
Giving is a personal choice. Most taxpayers give because it feels good to help the less fortunate, not to get tax benefits. Still, the long-standing tax deduction for charity has been a positive catalyst for philanthropy. While tax laws are ever changing, you can maintain your legacy of giving by being strategic. Early and careful planning with your tax and financial planning professionals can not only help you to create a lasting strategy, but can also help to reduce the high stress of tax time.