Tax reform impacts on charitable giving

January 26, 2018

By Ron Detweiler, CPA
Senior Tax Manager

On Dec. 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017. This Act represents the first major overhaul of the United States tax system in 30 years. The primary changes are to broaden the individual tax rates and brackets, lower the corporate tax rate to 21 percent, provide a tax deduction for pass-through businesses, and many other far-reaching provisions – most are effective for tax years beginning after Dec. 31, 2017.

From an individual income tax perspective, the Act:

  • reduced tax rates
  • changed tax brackets
  • substantially increased the standard deduction
  • eliminated personal exemptions
  • increased the Alternative Minimum Tax (AMT) exemptions and phase-out amounts
  • eliminated all of the miscellaneous itemized deductions currently subject to the two percent floor under present law
  • suspended the overall limitation on itemized deductions for upper-income taxpayers
  • eliminated the deduction for interest on home equity loans
  • reduced the amount of allowable mortgage interest on new home acquisition debt and caps state and local tax deductions (including property taxes) to $10,000
  • increased the child tax credit to $2,000 per qualifying child under age of 17
  • added a $500 nonrefundable credit for other qualifying dependents
  • identified that qualified higher education expenses will include tuition paid in connection with elementary or secondary public, private, or religious schools with annual limits of $10,000 in cash distributions from Coverdell education plans and 529 accounts
  • made several changes to charitable contributions

Impact on charitable giving

For charitable giving, the Act increases the adjusted gross income limitation on cash contributions from 50 to 60 percent for all taxpayers and repeals the deduction for contributions made for university athletic seating rights.

Before tax reform, approximately 30 percent of taxpayers itemized their deductions, but now it is anticipated that as few as 5 percent of taxpayers will do so for federal purposes. There will still be an incentive for most taxpayers to itemize deductions for Iowa tax returns. While not a new concept, the bunching of charitable donations in alternate years may allow taxpayers to continue to receive tax savings from their charitable giving.

Strategies moving forward

Bunching donations in alternate years may help to exceed the new larger standard deduction and gain some advantage from the unique timing or bunching of donations. One other vehicle that may make it easy for taxpayers to bunch their charitable donations is using a donor advised fund (DAF). The donor can claim the charitable tax deduction in the year of funding the DAF but is able to make grant requests to the desired charities over one or more years.

The potential for tax savings can be greater if the taxpayer contributes appreciated long-term capital gain property to the DAF by shifting the appreciated securities and inherent gain to the charitable organization.

Another beneficial provision made permanent with the Protecting Americans from Tax Hikes (PATH) Act of 2015, enables donors over age 70½ to affect a Qualified Charitable Distribution (QCD) allowing for the direct transfer from your Individual Retirement Account (IRA) to a qualifying charitable organization. The primary benefits of doing a QCD directly from your IRA to a qualifying charitable organization are that the transfer is not counted as taxable income and it does meet your annual Required Minimum Distribution (RMD).

These and many other charitable giving strategies are available such as Charitable Lead Trusts and Charitable Remainder Trusts. Please consult your tax advisor or attorney for legal and tax advice associated with any questions regarding tax reform or your charitable giving strategies.

For additional questions, call 888-556-0123 or complete our form.

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