The Tax Cuts and Jobs Act (effective 2018)
Clocking in at 503 pages, the new tax law became effective on January 1, 2018. The provisions relating to individuals are set to expire at the end of 2025, meaning that unless Congress acts before then to extend the provisions or make them permanent, in 2026 the 2017 law would be back in effect. (Provisions related to business taxes do not have an expiration date.)
What is in the Law that Affects Charitable Giving?
- Itemized Deductions - The charitable deduction will be retained, but some other itemized deductions will be eliminated or subject to limitations. For example, state and local taxes will be deductible only up to a combined annual limit of $10,000. Deductions for mortgage interest will be limited to $750,000 of debt for those married filing jointly.
- Standard Deductions - The law increased the standard deduction to $12,000 for singles, $24,000 for married couples filing jointly, and $18,000 for heads of households. Your itemized deductions (including your charitable deductions) reduce your income tax if their total exceeds your applicable standard deduction amount.
- Increased Deduction for Cash Gifts - The deduction limitation on charitable gifts of cash to public charities increased from 50% to 60% of adjusted gross income (AGI). The deduction limitation on charitable gifts of appreciated property to public charities will remain 30% of AGI. If you itemize, you will continue to be able to carry forward the unused portion of your charitable deductions subject to either limitation for up to five years.
- Increased Exemption Amounts - The gift tax, estate tax, and generation skipping tax will continue and estates will still be entitled to an unlimited estate tax deduction for charitable gifts. However, the exemption amounts for each of these taxes will double to $11.2 million per individual ($22.4 million for gift and estate tax for married couples).
- Athletic Event Seating - The law repeals the 80% charitable deduction for gifts made in exchange for college athletic event seating rights.
How will the Tax Reform Act affect you and your charitable giving?
While there will be an overall increase in the number of individuals claiming the standard deduction, if you live in a state with high income and property taxes and you have a mortgage, you could find that you still itemize and thus can make use of your charitable deductions.
Even if you don’t itemize, here are some strategies to make gifts to charity and still receive tax benefits:
- Make gifts of appreciated property, such as publicly-traded securities, to charity. The new law will still allow you to make gifts of appreciated assets you have owned long-term (a year and a day or longer) without triggering capital gain tax. If you itemize your deductions, you will get an additional tax benefit – an income tax charitable deduction based on the full fair market value of the appreciated assets.
- Make gifts to charity using the charitable IRA rollover. If you are 70½ or older, you can make a direct transfer from your traditional IRA or Roth IRA to charity of up to $100,000. You will avoid all income tax on your withdrawal, even if you don’t itemize under the new law.
- You can make larger gifts to charity. Your total deductions may put you close to the threshold where itemizing your deductions offers greater tax benefits than taking the standard deduction. In this case, you might consider making a larger charitable gift so that you can enjoy the additional tax savings that itemizing would offer.
- Include a gift for charity from your estate. The new tax law retains current law and does not impose limits on estate tax charitable deductions. If you have sufficient assets and may be subject to estate tax, you might consider a gift to charity from your will, trust, or other estate planning documents. Such a gift will reduce your estate tax burden.
- Make a gift to charity from all or a portion of what’s left in your retirement plan. Assets in your IRA, 401(k), or other qualified retirement plan may be subject to income tax when distributed to heirs. Making a charity a beneficiary of a portion or all of your retirement plan will avoid the income tax that your heirs might otherwise have to pay. You can plan to give your heirs different assets that would have a more favorable tax treatment, thereby increasing the tax efficiency of your estate plan.
We are pleased to provide you this information, and encourage you to contact your advisors for applicability to your personal circumstances. If you are interested in additional information, please feel free to contact us.