The new Tax Cuts and Jobs Act was signed by President Trump on December 22, 2017. The great news is that charitable contributions remain deductible for income, estate, and gift tax purposes.
Contributed by Jane Caddell Paddison, Board of Trustees
The new Tax Cuts and Jobs Act (the “Act”) was signed by President Trump on December 22, 2017. Although some provisions are retroactive, the changes covered below all have an effective date of January 1, 2018. The great news is that the Act continues to provide that charitable contributions are deductible for income, estate and gift tax purposes!
What has remained the same?
Charitable Contributions from an IRA. There has been no change here! A taxpayer who is 70 ½ and older may make a direct transfer of up to $100K per year from an IRA directly to a charity (but not to a Donor-Advised Fund). The transfer will count towards the taxpayer’s required minimum distribution, thereby reducing the taxpayer’s taxable income for the year of transfer.
Avoidance of Capital Gain Tax. Again, no change! A taxpayer will still avoid capital gains tax on the donation of appreciated stock even if the taxpayer does not itemize.
Full Charitable Deduction for Estate Tax Purposes. Still deductible!! There continues to be a full dollar-for-dollar deduction for charitable contributions at death. In addition, the designation of a charity as a beneficiary of a retirement account will continue to avoid both estate tax and income tax on the amount contributed.
What’s changed?
Schedule A Charitable Deduction – Bunching. Some taxpayers file a Schedule A to report income tax deductions, and some do not. For instance, for 2017, a married taxpayer filing a joint tax return may either take a standard deduction of $12,700 or deduct the total of the Schedule A itemized deductions, including the charitable deduction. In 2018 and later years, the standard deduction has been increased to $24K for a married couple filing jointly, and many of the Schedule A itemized deductions have been eliminated or capped.
The charitable deduction has not been eliminated, nor are there any new caps. However, the change in other Schedule A deductions may result in some taxpayers taking the standard deduction and no longer filing a Schedule A and, therefore, not taking a charitable deduction for the charitable donations made during the year.
Moving forward, one way to maximize the tax benefit of charitable giving is to bunch donations into one particular tax year in order to increase the charitable deduction reported on Schedule A, thereby increasing the Schedule A itemized deductions above the standard deduction.
The bunching of the contributions is best used in conjunction with a donor advised fund, as the taxpayer continues to direct the timing and identification of the ultimate charitable recipient by directing distributions from the fund. Even if there are no additional donations made following the “bunched contribution,” the charity will continue to receive annual distributions from the Donor-Advised Fund.
With the elimination or capping of many of the itemized deductions, the charitable deduction is one deduction that still provides year-to-year tax planning opportunities for the taxpayer.
Increase In Limitation for Cash Donations. The deduction for charitable donations has always been limited by varying percentages of a taxpayer’s adjusted gross income based on the nature of the gift and the type of charitable entity receiving the gift. The limitation for the charitable deduction for donations of cash to a public charity (which would include a community foundation, but would not include a private foundation) has now been increased from fifty percent to sixty percent of adjusted gross income. The increase in the limitation will result in a larger current deduction for some taxpayers.
Elimination of Pease Limitation. Prior to 2018, itemized deductions, including the charitable deduction, were limited for some upper-income taxpayers. This limitation was known as the Pease limitation and applied in addition to all other applicable limitations. The Pease limitation resulted in itemized deductions being reduced up to 80% in some situations. The Pease limitation has now been eliminated allowing for larger charitable deductions.
