The 2017 tax reform legislation package made several changes that make it especially important for charitably inclined clients to closely evaluate their charitable giving plans for 2018.
While many clients evaluate their plans to give to charity around the holidays each year, in 2018 it is particularly important that clients consider their gifting strategies for the next several years in order to maximize the tax benefits of their generosity. While obtaining tax benefits may not be the primary motivating factor for a client’s gifts to charity, the federal tax deduction for charitable gifts can prove valuable at tax time—and, with smart planning, there’s no reason that clients need to forego those tax benefits under the new tax law.
Tax Reform Changes the Charitable Contribution Calculus
The 2017 tax reform legislation roughly doubled the standard deduction to $24,000 per married couple and $12,000 per individual in 2018. The law also limited the value of itemized deductions so that fewer clients will itemize under the new tax law. For example, the deduction for state and local taxes was capped at $10,000, and the mortgage interest deduction was limited to interest on (new) mortgages of $750,000 or less.
Although the charitable contributions deduction itself was left intact, because clients are required to itemize in order to claim a deduction for gifts to charity, this means that most taxpayers will also no longer receive a deduction for charitable donations without careful planning.
Clients must also continue to consider the income-based limits that restrict the charitable contributions deduction to 60 percent of adjusted gross income (AGI) for clients who make cash gifts in 2018, and 30 percent of AGI for non-cash gifts that would receive capital gains treatment (the popular gift of appreciated stock is subject to this restrictive 30 percent limit).
Despite these limits, wealthy clients may still benefit from donating appreciated stock. For these clients, donating appreciated stock can continue to be valuable even though the deduction is limited to 30 percent of AGI (or eliminated entirely if the client does not itemize) because the client is still able to generate tax savings by donating the stock instead of selling it and paying the associated tax. Further, donating appreciated stock allows the client to make a larger gift because the appreciation in the stock’s value is essentially donated pre-tax.