Broker Check

New Tax Rules: Should Your Charitable Giving Plans in 2018 Be Different?

June 19, 2018
Share |

 

The short answer is, “Yes.”  Well, maybe.  Most likely.

Contrary to the rumors, the charitable deduction is unchanged.  

However, the applicability of the deduction – claimed by those who file using itemized deductions – has become less likely as fewer taxpayers in 2018 and thereafter will itemize.  

Previously, a third of taxpayers itemized their deductions.  It is expected that as few as 10% will do so in 2018.

Why?  

The Tax Cuts and Jobs Act of December 22, 2017 shrinks or eliminates many itemized deductions but not for charitable donations. 

The big difference that affects most filers is that the standard deduction is doubled.  A married couple’s standard deduction is now $24,000; the single’s is $12,000.  As a result, many taxpayers will now find it more beneficial (and simpler) to just take the standard deduction than to itemize. Even if they give to charity, the tax-deductibility of charitable donations will no longer be effective.

For sure, the wealthy who support the arts, clinical research projects, universities, etc. will continue to contribute and receive the deduction.  For most ‘small contributors’ the charitable deduction disappears.  

The question that plagues charities is, “Will people continue to support causes without the deductibility?”  Hopefully, giving to charity is valuable for reasons that go beyond the tax benefits.   

However, tax-deductibility does drive certain transactions, such as donations of appreciated property to a charity, thus avoiding capital gains tax and assuring full value of the item (less sales costs) to the charity.

To ‘recapture’ the lost deduction requires pre-planning and a more than casual desire to be charitable.

A simple example is where a couple adds up its 2018 deductions (in October, projecting year-end) and arrive at $23,500.  If they give an additional $1,000 to charity, their total itemized deductions exceed the standard deduction by $500.  Therefore, if pays them to itemize and get the full deduction of their contribution.

Another option would be to anticipate and contribute several years’ worth of donations in a single tax year to assure going over the standard deduction threshold into a donor-advised fund, often a special mutual fund. The cash and any proceeds from donated appreciated property are invested by a professional manager.  You control the timing and amounts of distributions to the charities you select.  You can add to the fund when you wish or when you have enough to again claim the deduction.  Family members could open their own accounts or add to the same fund.

There are Local Public Foundations in most large towns or cities established to accommodate just such a plan, such as the Delaware Community Foundation with offices in each County.  Within the Foundation, each donor has a named “George Donor Family Account” from which the donor directs distributions. The investment is usually managed efficiently for growth, income or both.

Alternatively, if you have a large amount to donate and possibly more later, you may choose to establish your own irrevocable “Mary Smith Charitable Trust” that you manage personally. 

A third possibility is the establishment of a Charitable Trust that donates its income to charities and the remaining principal at your death, or after “X” years, is funneled to your heirs: your grandchildren, etc.

Fourth, a variation on the above:  Fund a trust that distributes income to yourself and/or a dependent for life with the remainder paid to charity at the death of the income recipient(s).

If someone other than a charity (yourself, a ward, a spouse) receives a benefit, less than 100% of the contribution will qualify as tax-deductible.

Finally, if you own a business, why not have it become the primary donor to your favorite charities?  Have it sponsor local scholarships or support other charitable projects or causes.  Let the business take the write-off as advertising or as a donation.

 •  Ω  •