The Tax Cut Jobs Act of 2017 changed the landscape for charitable giving. While charitable giving has never only been motivated by tax deductions, those deductions have been an important part of the planning process and have often defrayed significant portions of the costs of donating. That has all changed. However, some creative tax planning can still salvage those donation tax benefits. They key, however, is to be very taxpayer specific. What will work for one group of donors will not work for others. This makes planning more complicated since you must target your circumstances to identify the techniques best for you. This article will explore some of the new charitable tax planning landscape and give you specific techniques to choose from to salvage most of, or even all, your deductions. Future articles will continue the discussion of planning techniques under the new laws. For a video on this and other planning ideas see https://laweasy.com/videos/charitable-planning-after-2017-tax-act/?cat=51

Income Tax Changes Eliminate Tax Benefits for Most Donors

To understand the new face of charitable planning start with understanding the new rules. The 2017 Tax Act doubled the standard deduction thereby eliminating most tax benefits for charitable donations. The standard deduction which taxpayers can claim on their income tax returns without itemizing has been approximately doubled from $12,000 to $24,000 (for married couples filing joint income tax returns). But other changes will exacerbate this. The $10,000 cap on state and local tax deductions will limit those deductions for many taxpayers so state and local taxes will not push as many taxpayers over the standard deduction amount. Finally, many deductions have simply been eliminated. The result is that most taxpayers will use the standard deduction, not itemize. That means no charitable contribution deduction unless those non-itemizing taxpayers plan. We’ll tell you how.

How much of an impact with these changes have? One estimate is that 30 million taxpayers itemized deductions and that figure will plummet to a mere 5 million. Consider the impact of that on deductions for donations. The doubling of the standard deduction to $24,000 is estimated to lower charitable giving by $13 billion per year.

The study supporting the above stats can be found at https://www.councilofnonprofits.org/sites/default/files/documents/tax-bill-summary-chart.pdf

Creative tax planning, and emphasizing non-tax benefits, may help offset some of these losses. Charitable giving might be modified to provide tax benefits in the new environment. Some of the techniques that might grow in importance are suggested below.

Donating Appreciated Stock: Not the Same Benefit for Many Taxpayers

Harvesting your most appreciated stock or other assets and transferring those to charity has been a common charitable planning tool for a long time. Many financial advisers have this routine perfected and call clients late in each year to identify which positions should be transferred to charities before year end. Well for most donors the technique will still provide some benefit but not what it had. The traditional donation of this type meant transferring as a donation an appreciated asset, e.g. stock, to a charity. The donor never had to include the appreciation in income and in addition was permitted in most cases to deduct the full fair market value of the asset donated as a contribution deduction. That was a double benefit.

The 2017 Tax Act did not change these rules, but for most donors, the tax benefits will be reduced substantially. Donors need to understand this impact to determine how to plan donations (especially if they are relying on a tax benefit to offset a portion of the cost of the donation). Wealth advisers should understand these rules so that they can inform clients who continue making donations using this technique based on “muscle memory” that they may not realize the benefits anticipated.

The approximately doubled standard deduction means that only a small percentage of those who use to itemize will continue to do so. For those donors who no longer itemize donating appreciated stock will still provide a benefit in that they appreciation will avoid income taxation. That is a benefit. However, if they do not itemize they will not get any deduction for the appreciated property donated. Beneficial, but a lot less than it had been. For taxpayers who continue to itemize deductions, the benefits should be almost identical to those under prior law, although if they face a lower income tax rate post-2017 Tax Act the tax benefit might be reduced somewhat.

Bunching Will Help Some Donors (Maybe)

“Bunching” has been ballyhooed as a new and more tax efficient approach to charitable giving. While bunching will no doubt help some donors, it doesn’t seem likely to be a productive answer for many. But because it has been the subject of so much media buzz it warrants discussion. We’ll explain the idea, but before jumping through the many hurdles bunching requires, try to crunch the numbers and see if it will really help. For taxpayers on the cusp of exceeding the standard deduction bunching may prove worthwhile, but for those much below it the stretch to make it happen will be difficult or impractical. Also, bunching requires that taxpayers change what they want to do, and for most, that won’t be an agreeable condition. Bunching means consolidating donations, and any other deductions, into targeted years so that in those targeted years bunched deductions will exceed the standard deduction and provide an incremental tax benefit.

In some instances, if contributions are grouped into a targeted year the donations can be made to a donor-advised funds (“DAF”). The DAF will hold the larger periodic charitable gifts made in a targeted year until they are dispersed.

Example: Taxpayer defers discretionary itemized deductions such as charitable contributions and elective medical costs from 2019 to 2020. In 2020 the taxpayer pays the deferred 2019 expenses that will qualify as itemized deductions under the new law. Also, in 2020 donations the taxpayer pays the 2020 expenses. Finally, in 2020 the taxpayer accelerates 2021 deductions back into 2020. 2020 is the designated targeted year in which the taxpayer hopes by pushing and pulling deductions into that year she will maximize the amount in excess of the standard deduction. The following bullet points might clarify:

2019 – defer deductions to 2020. Claim the $24,000 standard deduction in this year.
2020 – targeted year in which all three years of deductions are paid. Perhaps use a DAF for contributions so they can be paid out in 2020 and 2021 although all deducted in 2020.
2021 – accelerate deductions into 2020. Claim the $24,000 standard deduction in this year.
While this might push some taxpayers over the standard deduction in the targeted year who might benefit? Lower wealth taxpayers are unlikely to exceed the standard deduction with this, and even if they do most donations will be lost. Wealthy taxpayers likely exceed the standard deduction with larger donations. Of those taxpayers who might benefit, how many will be willing to go to these lengths?

If a donor is going to use bunching that might encourage the use of charitable gift annuities (“CGAs”) and charitable remainder trusts (“CRTs”) to push larger deductions into the y ear of the gift. These techniques also comport with later life planning for an aging population of donors by providing cash flow in the donor’s later years.

Other More Technical Income Tax Changes

The 2017 Tax Act made other changes that affect charitable giving. While not as monumental as those noted above they are listed below to provide a more complete overview of the new charitable landscape:

Donations to colleges that provide a right to purchase tickets to athletic events will no longer be deductible. IRC Sec. 170(l)(2).
The income tax laws have limited donations to public charities and private operating foundations to 50% of a taxpayer’s adjusted gross income (“AGI”). The Act increases this limit to 60% for cash contributions. While this is a positive for very wealthy taxpayers who can afford to gift to such levels it is curious why this provision was added to the Act. Currently, donations are limited to 50% of AGI (and lower, 30% or 20%, for other types of donations). For some high-end donors, this benefit and the elimination of the PEAS limitation will enhance the tax benefits of large cash donations.
The tax law had permitted an exception to the requirement to obtain a contemporaneous written acknowledgement from a charity. This exception has been repealed so that an acknowledgement must be obtained in all instances. IRC Sec. 170(f)(8)(D).
I am an estate planning attorney, author of 42 books, and more than 1,200 articles. I serve on the editorial boards of Trusts & Estates Magazine, CCH (Wolters Kluwer) Professional Advisory Board, CPA Magazine, and the CPA Journal. I’m active in many charitable and commun.