The Tax Reform Act and Charitable Giving

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The Tax Cuts and Jobs Act (TCJA) became effective on January 1, 2018. The provisions relating to individuals are set to expire at the end of 2025. That means that unless Congress acts before then to extend the provisions or make them permanent, in 2026 the tax law as it existed in 2017 prior to the passage of the TCJA would take effect.  Provisions related to business taxes do not have an expiration date.

What is in the Law that Affects Charitable Giving?

  1. Tax rates across every tax bracket are lower. As a result, you may realize more after tax income and may find you have more income available for charitable gifts.
     
  2. The charitable deduction will be retained. Some other itemized deductions will be eliminated or subject to limitations.  State and local taxes will be deductible only up to a combined annual limit of $10,000. Deductions for mortgage interest will be limited to $750,000 of debt for those married filing jointly.
     
  3. The standard deduction increased and is indexed it to inflation. In 2020 the standard deduction is $12,400 for singles, $24,800 for married couples filing jointly, and $18,650 for heads of households.  Your deductions (including your charitable deductions) will not reduce your income tax unless their total exceeds your applicable standard deduction amount.  
     
  4. The adjusted gross income (AGI) limitation on charitable gifts of cash to public charities is 60% of AGI. The AGI limitation on charitable gifts of appreciated property to public charities remains 30% of AGI. If you itemize, you will continue to be able to carry forward deductions subject to either limitation for up to five years.
     
  5. The gift tax, estate tax, and generation skipping tax continue and estates are still entitled to an unlimited estate tax deduction for charitable gifts. However, the exemption amounts for each have increased and are also indexed to inflation. In 2020, lifetime gifts and transfers up to $11.58M per individual are free of estate and gift taxes ($23.16M for married couples filing jointly).
     
  6. The TCJA repeals the 80% charitable deduction for gifts made in exchange for college athletic event seating rights.

How will the Tax Reform Act affect you and your charitable giving? 

While there will be an increase in the number of individuals claiming the standard deduction, if you live in a state with high income and property taxes and you have a mortgage, you could find that you still itemize and thus can make use of your charitable deductions.       

Even if you don’t itemize, here are some strategies to make gifts to charity and still receive tax benefits:

  • Make gifts of appreciated property such as publicly-traded securities to charity. The new law will still allow you to make gifts of appreciated assets you have owned for at least one year without triggering capital gain tax.  If you itemize your deductions, you will get the double tax benefit of an income tax charitable deduction based on the full value of your appreciated assets in addition to complete capital gain tax avoidance.
  • Make gifts to charity using the charitable IRA rollover. If you are over 70½, you can make a direct transfer from your traditional IRA (or Roth IRA) to charity of up to $100,000 (although the amount transferred will not offset your RMD until you reach the age of 72. For those who were 70½ prior to the passage of the SECURE Act you will continue to take your RMD). You will avoid all income tax on your withdrawal, even if you don’t itemize after the new law!
  • Consider “stacking” your gifts or pre-paying your routine charitable giving. Making a larger donation in a given tax year can increase your federal deductions above the standard deduction level and allow you to itemize. In subsequent years you can then take the standard deduction. One way to do this is through a Donor Advised Fund (DAF). You can deposit cash, appreciated securities, or other assets into an account maintained and operated by a sponsoring organization which has a tax designation as a 501(c)(3). After funding a DAF you have the flexibility to decide when and how to make your charitable grant recommendations. You have the added benefit that assets in a DAF grow tax free. You can also designate a charity to receive the remainder of your DAF upon your passing.
  • You can make larger gifts to charity. Your total deductions may put you close to the threshold where itemizing your deductions offers greater tax benefits than taking the standard deduction. In this case, you might consider making a larger charitable gift so that you can enjoy the additional tax savings that itemizing would offer.
  • Include a gift for charity from your estate. The new tax law retains current law and does not impose limits on estate tax charitable deductions. If you have sufficient assets and may be subject to estate tax, you might consider a gift to charity from your will, trust, or other estate planning documents.  Such a gift will reduce your estate tax burden.
  • Make a gift to charity from all or a portion of what’s left in your retirement plan. Assets in your IRA, 401(k), or other qualified retirement plan may be subject to income tax when distributed to heirs (and will be forced to take the distributions within 10 years for certain beneficiaries). Making a charity a beneficiary of a portion or all of your retirement plan will avoid the income tax that might otherwise be due from your heirs. This is an extremely tax efficient way for you to make gifts to charity that costs your heirs less than giving other kinds of assets.  

Download more information about IRS Releases 2020 Tax Rate Tables, Standard Deduction Amounts And More - Forbes.

Williams College does not provide legal or tax advice. Please consult your own legal and tax adviser in connection with gift and planning matters.  For more information, call the Office of Gift Planning (413) 597-3538, toll-free (877) 374-7526, or e-mail us at gift​.planning​@williams.edu.