For many Americans, giving money to support nonprofits and causes they care about is a year-round commitment. Still, the volume of charitable giving typically increases at the end of the year as the holiday spirit and year-end tax planning combine to encourage people to give a little more.
Donations by individual Americans rose by 5.2 percent to nearly $287 billion in 2017, according to “Giving USA 2018: The Annual Report on Philanthropy for the Year 2017." That amount represented 70 percent of all donations in the U.S.
However, with the Tax Cuts and Jobs Act of 2017, many rules could cause individual taxpayers to adjust their tax strategies in 2018 and beyond.
One such change increased the standard deduction from $6,500 to $12,000 for individuals, and from $13,000 to $24,000 for married couples filing jointly. That could affect the tax benefits people traditionally received from charitable giving, because when the standard deduction was lower and itemization tended to provide people with a reduced tax bill, people had more incentive to give to charities because they were able to lower their tax burden with their donations. Taxpayers who choose the standard deduction won't see that particular benefit from their charitable giving, says Malia Haskins, manager of internal wealth management strategies at RBC Wealth Management-U.S. in Minneapolis, Minn.
“Charitable giving is still encouraged by a corresponding income tax deduction, but the amount taxpayers have to give in order for itemized deductions to lower their tax bill is a lot greater," says Haskins. “And now that the standard deduction, which doesn't require itemization, has been increased, more people may go that route."
A second reform, which caps the amount taxpayers can deduct for state and local sales, income and property taxes (known as SALT) to $10,000 combined, compounds the likelihood that more people will file their federal income taxes using the standard deduction, says Haskins.
“By capping the SALT deductions at $10,000, and with a larger standard deduction, total itemized deductions for many taxpayers won't exceed the standard deduction, so itemizing won't make sense," she says. "Donations to charity are an itemized deduction, so while people still plan to give to charities, they may need to rethink the way they give to maximize their tax benefits."
The SALT cap is anticipated to have the biggest impact on taxpayers in states with high tax rates, such as New York, New Jersey, California, Connecticut and Minnesota, among others.
In addition to changes in rules for itemization, the amount of your cash donations to charity that you can deduct has been increased from 50 to 60 percent of your adjusted gross income. The amount of capital assets such as stocks, real estate or other donations that you can deduct is capped at 30 percent of your adjusted gross income.
So, while taxpayers who choose the standard deduction won't receive a tax benefit for their charitable contributions, the increased amount you can deduct for cash donations provides an incentive for big donors to up their level of giving.
Tax strategies for charitable giving
The 2017 tax reform means that it's more important than ever for people to carefully plan their end-of-year giving.
“As the end of the year approaches, you should think about your current charitable donations and then meet with your accountant and your financial advisor to get a picture of your tax situation," says Cathy Walker, professional trustee services manager at RBC Wealth Management-U.S. “That will help you plan for your charitable giving within the context of your taxes."
Five tax strategies to consider in light of tax reform are:
1. Bunching donations
In order to make it worthwhile to itemize deductions rather than take the standard deduction, married taxpayers need more than $24,000 in total deductions. One way to go beyond that threshold is to bunch your charitable donations into one year to maximize your deduction and then determine how much you can give the following year, Walker says. For example, if you typically give $10,000 annually in donations, Haskins suggests giving $20,000 in 2018 to be able to itemize. For 2019, you would give any amount you wish but possibly take the standard deduction for that year's taxes, followed by $20,000 the following year in order to itemize again. “The amount has to be specific to your individual circumstances, so it's best to work with an accountant to look at your whole situation," Walker says.
2. Donor advised funds
A donor advised fund (DAF) is a charitable giving tool that's been available for years to help families provide significant gifts and maximize their tax deductions. “While a donor advised fund is similar to a private foundation, it's much easier to set up and doesn't require an attorney," Walker says. “The minimum amount you can put in the fund can be as low as $2,500 or as high as $50,000. You just fill out a form, choose a name for your account and put the assets in the fund." You choose the amount to put into the fund and have the ability to choose the charity or charities to which you want to direct the funds over time. The DAF has a board of directors, which must vet your choice of charity. “For example," Walker says, "you can put $50,000 in a donor advised fund and get the tax deduction for that amount in that year. Then you ask the board to donate $1,000 to the animal shelter and $1,000 to another charity at any time. Typically, the board members approve your request." Parent companies of DAFs often provide options for the investment component of the fund. “An advantage of a donor advised fund is that while you take the tax deduction for the amount of your donation, you can continue your giving pattern as before for each charity, such as $5,000 per year, rather than giving the donation all at once," Haskins says.
3. Cash or capital asset donations
Tax reform didn't change the deductibility of a donation in the form of a capital asset such as an appreciated stock or real estate, which remains at 30 percent of your adjusted gross income. “Your financial planner and your tax planner can help you decide whether it's more advantageous to donate cash or appreciated securities," says Walker. Stocks can be great assets to give to charity in some circumstances, Haskins adds, because you get the tax deduction on the fair market value of the asset and you also don't have to pay tax on the gain when it's been donated or placed in a DAF.
4. Qualified charitable distributions
Individuals who are 70-1/2 or older are required to take a minimum distribution from their IRA account. “If you don't need the income or don't want it, you can give up to $100,000 of it directly to a charity," says Walker. “You don't get a tax deduction for the gift, but you don't pay taxes on the income, either." While the rules surrounding charitable donations to fulfill your required minimum distribution from an IRA haven't changed, tax rates for various income brackets were lowered through tax reform. “If your IRA distribution goes directly to the charity, that reduces your taxable income, potentially to a lower tax bracket," Haskins says.
5. Deferred giving and estate planning
While tax reform raised the threshold for federal estate taxes to $11.18 million per person and $22.36 million for a married couple, families in several states also need to address state estate taxes. “For families with assets that have significantly appreciated, a charitable remainder trust can be an ideal vehicle to ensure that more of their assets go to a charity and to family members rather than to the government," says Haskins. A charitable remainder trust, funded with cash, stocks or real estate, can provide the donor with an income stream for many years in addition to a tax deduction. When the donor passes away, the remaining assets in the trust would be given to the designated charity. A donor advised fund can also be named as the designated charity, which has the benefit of providing funds for the next generation's giving, says Walker.
Everyone's situation is different, so Haskins recommends meeting with your financial planner and CPA to discuss how tax reform may affect you.
“As the end of the year approaches, it's important to run tax projections with your CPA and get help crafting a plan before Dec. 31," she says.
It's also important to keep in mind that tax laws could eventually change again.
“Tax reform for individuals is set to sunset in 2025, at which time the rules will revert to 2017 rules or some other rules will be put in place," Haskins says. "So your decisions should be made with the understanding that things may look different in seven years."
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor.