By Todd Miller, CPA
Last year, Congress passed some of the largest tax law changes experienced in decades. For individuals, the tax law changes as a result of the Tax Cuts and Jobs Act (TCJA) are primarily in effect beginning in 2018 and last through 2025.
The law changes require every taxpayer to revisit their personal situation, specifically their charitable giving strategy, to see if their current approach to tax planning still provides them with the same benefit as it did prior to the law changes.
Below are some of the biggest impacts to the majority of taxpayers:
- Tax Rates – A new tax rate structure with the highest tax rate dropping from 39.6 percent to 37 percent, the highest rate applying to single taxpayers with taxable income above $500,000 and $600,000 for married couples filing jointly. An overall reduction in tax rates at all income levels was also part of the tax bill.
- Standard Deduction – The standard deduction increases from $12,700 to $24,000 for joint filers and from $6,350 to $12,000 for single taxpayers. Given these changes, many taxpayers will no longer itemize deductions and instead take advantage of the higher standard deduction.
- Exemptions – In 2017, taxpayers were able to claim a $4,050 personal exemption for themselves, their spouses and any dependents. Starting in 2018, taxpayers can no longer claim personal or dependency exemptions.
- State & Local Taxes – The itemized deduction for state and local income, sales and property taxes is limited to a total of $10,000 starting in 2018.
- Charitable Contributions – The deduction for charitable contributions was not impacted for the most part. However, the deductibility limit on cash contributions to public charities increased from 50 percent of adjusted gross income to 60 percent.
- Miscellaneous Itemized Deductions – There is no longer a deduction allowed for items such as tax preparation costs, investment expenses, union dues and unreimbursed employee expenses. Historically, these items were deductible to the extent they exceeded two percent of the taxpayer’s adjusted gross income.
- Overall Limitation on Itemized Deductions – The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded certain thresholds.
Given the increased standard deduction, the limit on state and local tax deductibility and suspension of miscellaneous itemized deductions, many taxpayers will find it more important to plan their philanthropic giving in order to maximize the charitable contribution deduction.
Many of the same techniques used historically for charitable giving are still valid under the new tax law. However, there are some new strategies to consider when making charitable contributions in 2018 and beyond.
Popular ways of giving include:
- An outright cash gift – A donor-advised fund (DAF) is an ideal way to receive an immediate income tax deduction, manage gifts to multiple charities, or defer giving to a later date.
- A gift of appreciated assets – A sale of an appreciated asset and subsequent cash contribution generates income tax on the gain and potentially subjects the gain to an additional net investment tax of 3.8 percent, which ultimately results in less cash to the charity. A more widely-used technique is to donate the appreciated asset to the charity directly, which results in a potential fair market value deduction. In order to benefit from the fair value deduction the appreciated asset has to meet certain criteria and may still be subject to adjusted gross income limitations. However, gain recognition is avoided on the sale and the charity receives an asset with a larger value than in the sale scenario. The donation of appreciated publicly held securities is one of the most popular non-cash giving techniques. With the recent stock market gains, many taxpayers may have substantially appreciated investments that would be ideal for this purpose.
New strategies for giving:
- Timing – To ensure you receive the most benefit under the new law, the timing of your charitable contribution may be the most important decision for you to make. Given that the standard deduction is now $24,000 for married couples, the sum of the state and local tax deduction (limited to $10k under the TCJA), mortgage interest deduction and charitable contributions must exceed $24,000 in order to receive a tangible charitable contributions tax benefit.
- Bundling – Taxpayers may want to consider bundling charitable contributions every other year to increase their itemized deductions to a level that surpasses the standard deduction every other year (and take advantage of the standard deduction in the alternate years). A DAF is a useful tool to manage bundling.Note: You will want to discuss this possible negative impact to bunching your charitable contribution if your contribution amount exceeds the AGI limitations.
- Example Scenario
Consider a taxpayer with a 2018 property tax deduction capped at $10,000, mortgage interest deduction of $8,000 and who historically makes charitable contributions of $5,000 at the end of the year. The total itemized deductions for 2018 is $23,000 ($1,000 less than the new $24,000 standard deduction).
The taxpayer receives no charitable contribution tax benefit. As an alternative, the taxpayer may wait until January 2019 to make the $5,000 charitable contribution and, before the end of 2019, donate an additional $5,000.
In this scenario, the taxpayer still benefits from the $24,000 standard deduction in 2018. However, in 2019, the taxpayer may itemize deductions as the updated itemized total is $28,000 ($4,000 higher than the standard deduction). The bundling of the charitable deductions in 2019 provides tax savings that are not realized when $5,000 is donated annually for 2018 and 2019.
While the tax law brought about many changes, the charitable giving rules under the new law remained virtually unchanged. However, variations to the itemized deduction limits and an increase to the standard deduction make it important for all taxpayers to re-examine their personal deduction strategy and charitable giving approach to maximize their after-tax impact.
Interested in opening a DAF? Learn what Austin Community Foundation can do for you.
Todd Miller is a certified public accountant and tax partner at the Round Rock office of Maxwell, Locke & Ritter. He has almost 15 years of experience in taxes, family partnerships and pass through entities and their owners.