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.
Post-Tax Reform Giving Strategies
Because of the expanded standard deduction, many clients may consider using a “bunching” strategy to consolidate charitable gifts into a single year in order to cross the standard deduction threshold and itemize. For example, if a client typically donated $15,000 per year to charity, that client may want to consider donating $30,000 in 2018 and forgoing the donation in 2019. The client would then be entitled to claim the itemized deduction in 2018, rather than potentially missing out on the deduction in both years.
Other clients may be concerned with providing steady, continuous support to a charity of their choice, and will be concerned that the bunching technique will leave the charity without a regular gift during “off” years. Setting up a donor advised fund can help these clients achieve their goals and maximize the tax benefits of their gifts.
A donor advised fund is an account set up with a financial institution that can be funded with a large donation in a single year, but allows the client to direct funds to the charity or charities at their discretion in order to continue to provide a more steady stream of support to the client’s chosen organizations.
The ”qualified charitable distribution” (QCD) strategy can continue to benefit older clients who must take required minimum distributions (RMDs) from an IRA. These gifts are made directly from the IRA to the charity, and then serve to reduce the client’s RMD for the year. A QCD provides substantial tax benefits because the donation directly reduces the client’s tax liability with no need to itemize.
For example, if the client is required to take a $50,000 RMD and elects to direct $20,000 to charity, his or her taxable income from the IRA is limited to the $30,000 balance—potentially even allowing the client to drop into a lower tax bracket.
There is no one-size-fits all approach to charitable giving, but the new tax reform law has not eliminated the tax benefits that can be realized from donating. With careful advance planning, most clients can continue to support the charities of their choice while still obtaining substantial tax savings.
- See previous coverage of planning under the new tax reform rules in Advisor’s Journal.
- For in-depth analysis of charitable giving strategies, see Advisor’s Main Library.
- Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.