The new tax law will undoubtedly have a material impact on the charitable sector. Given the increase in the standard deduction, for instance, the majority of taxpayers will no longer be itemizing. And that’s big news, because according to data from the IRS, prior to tax reform, approximately 30 percent of taxpayers itemized their deductions. Now, with the recent changes, it is anticipated that as few as 5 percent will do so.
However, for those who can and do still itemize, there is some good news: The threshold limiting charitable deductions has increased from 50 percent to 60 percent of their AGI (adjusted gross income). This may permit taxpayers to gain further tax savings in 2018 as compared to 2017.
Starting in 2018, the standard deduction has increased to $12,000 for a single filer and $24,000 for married couples. To the extent that their total deductions exceed the standard deduction, taxpayers can now itemize that amount, thereby gaining additional shelter from taxation.
With the new $10,000 cap on state tax deductions, as well as the elimination of the ability to deduct investment fees, professional expenses and non-reimbursed business expenses, itemized deductions may be more limited than ever.
For example, assume that a married couple has an AGI of $250,000, pays $15,000 in state income taxes and $20,000 in property taxes, and has mortgage interest of $8,000, as well as $5,000 of charitable contributions. Under 2017 rules, they would have itemized deductions of $48,000 ($15,000+$20,000+$8,000+$5,000). Under the new law, however, because of the $10,000 cap on state income and real estate taxes, they will have only $23,000 ($10,000+$8,000+$5,000) of itemized deductions. With the standard deduction set at $24,000, they will essentially receive no tax benefit for being charitable.
One solution to this issue is to try to lump together or accelerate charitable deductions, perhaps by using a donor-advised fund. A donor-advised fund is a charitable investment account that has the singular purpose of supporting charitable organizations. When you contribute to a donor-advised fund, you are generally eligible to take an immediate tax deduction for the entire contribution, yet you may disburse the fund to charities over a long period of time. In the interim, the funds may be invested for tax-free growth, and you may request that grants from the fund be made to any IRS-qualified public charity. Funding a donor-advised fund with several years’ worth of charitable contributions is a great way to ensure that you receive a deduction for tax purposes in any given year.
Funding a charitable bequest, or even a donor-advised fund, with appreciated securities is one of the most tax-efficient ways to make charitable contributions. When making a gift of appreciated securities to a qualified charitable organization, not only do you get a charitable contribution for the value of the security, you also avoid having to pay capital gains tax on the appreciation of the investment.
Donors should bear in mind that in order to get a deduction at fair market value, the security must have been held for over a year. In the event that the appreciated security has been held for less than a year, the donor will receive a charitable deduction limited to the cost basis.
In light of the vast fluctuations that have come with tax reform, taxpayers must be cognizant of the changes and speak with a competent tax advisor to ensure that they are maximizing their tax deductions to the fullest.
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