14 BWD | Fall/Winter 2018-2019
By Jeff Hert, CPA
Tax reform implications on charitable donations
New considerations and familiar tax planning strategies
Since the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017,
many taxpayers have focused on how it can impact their charitable
giving. According to the Association of Fundraising Professionals,
donations to charity decreased overall in the first three months of
2018 compared with the same quarter of 2017 – and cites tax reform
as a possible cause. Though charitable giving is generally motivated
by compassion, the TCJA includes several provisions that have
left individuals and charitable organizations contemplating how
charitable giving will be impacted.
Here are a few areas to help you in maximizing your donations due to
reform changes.
Focus on what’s important
According to the Urban Institute & Brookings Institution Tax Policy
Center, about 49 million taxpayers currently itemize. The TCJA
included an increase to the standard deduction, nearly doubling to
$12,000 for singles and $24,000 for married couples who file jointly.
With the higher standard deduction, fewer filers are anticipated to
itemize in the future. However, one way to boost the tax benefits
of charitable giving is by “bunching” donations into alternating tax
years to surpass the itemization threshold.
For example, suppose Karen, who files as a single taxpayer, donates
$10,000 to church every year. Typically, her donation allowed her
to itemize her deductions due to the fact she was above the lower
standard deduction threshold. She has deducted the amount from
her income as a charitable tax deduction. In 2018, her donation
may no longer help her surpass the standard deduction threshold.
If she bunches two years of donations into one year, she may be able
to itemize every other year and receive the full tax benefit of her
charitable donation.
Pease limitation repealed
The TCJA repealed the “Pease” limitation (named after Congressman
Donald Pease who introduced the legislation in 1991), which was
created to raise tax revenue by increasing the taxable income for high
income earners as much as 80 percent.
Because the Pease limitation reduced the tax benefits of itemized
deductions, including charitable contributions, taxpayers can now
potentially achieve larger tax savings through charitable giving.
New qualified charitable distribution rules
The 2017 tax bill did not change the regulations for qualified
charitable distributions (QCDs). QCDs allow anyone 70½ or
older to donate up to $100,000 annually to a public charity
directly from their IRA. Most senior citizens have little or no
mortgage interest and lower state income taxes due to receiving
lower taxable income in retirement. Therefore, they may not be
able to itemize with the new higher standard deduction limits
even with increasing their charitable giving.
For example, a 71-year-old couple with a required minimum
distribution of $24,000 can instead donate $10,000 of it directly
to charity as a QCD and reduce their taxable income in that same
tax year by $10,000. The couple would still be able to claim their
standard deduction of $24,000.
In this case, if their standard deduction of $24,000 is greater than
their total itemized deductions –including the $10,000 charitable
contribution – the QCD can provide a benefit, reducing their taxable
income and they can elect to take the greater standard deduction.
Take time to speak with your financial advisor and get a fresh look
on the best way to donate to charity moving forward. With careful
planning, you will be able to recognize the tax benefits of your
charitable giving.
ABOUT THE AUTHOR
Jeff Hert is a principal at Rehmann. Jeff provides
tax and business advisory services for individual
and business clients including manufacturers,
healthcare providers, contractors, retailers, real
estate holding companies, fiduciaries, small
business investment companies and
not-for-profit organizations. Contact
him today at [email protected].