How Will the Recent Changes to Itemized Deductions Affect Charitable Giving
As you prepare for your year-end giving plans, you may be concerned how the legislation recently passed by Congress may affect you. Here to assist you is a commentary by Tony Caleca, Managing Partner at Brown Smith Wallace and Deborah M. Vandeven, Certified Public Accountant of Brown Smith Wallace.
The tax code has changed, but the needs of charitable organizations remain just as urgent. While the charitable giving rules remain virtually unchanged, the Tax Cuts and Jobs Act (TCJA) passed in December 2017 makes four big changes that are likely to discourage charitable giving.
The new law:
- Lowers the individual income tax rates
- Caps the state and local tax deduction at $10,000
- Nearly doubles the standard deduction for an individual and families – which combined with item two significantly reduce the number of itemizers
- Roughly doubles the estate tax exemption to $22 million for couples, which will discourage tax-motivated bequests.
These changes make good on President Trump’s promise to simplify the tax code, but could also fundamentally weaken the ability of charitable organizations to raise money, provide services and benefit our communities. Of course, people don’t give to charity just to get a tax deduction, but the consensus is that the new tax law will curb charitable donations – to what extent is unknown.
In an effort to promote these worthy causes in our community while still maintaining tax benefits for our clients, we are making the following suggestions:
- Bunch donations to charities in specific years, while limiting donations in other years. When individual taxpayers contribute by bunching donations, they combine multiple years of normal annual charitable contributions into a single year. In the bunch years, the relatively large charitable contributions, in combination with other itemized deductions that cannot be timed this way – generally, mortgage interest and state and local taxes – will increase the likelihood of exceeding the standard deduction and thus provide taxpayers with additional savings. A contribution to a Donor Advised Fund (DAF) can help to achieve the goal of bunching contributions while still allowing you to contribute to your selected charities on your own schedule.
- Make a Qualified Charitable Distribution (QCD). At age 70 ½ the government requires you to take annual distributions from your retirement accounts known as Required Minimum Distributions (RMDs). Up to $100,000 of these RMDs may be made tax-free if they are directed to a qualified 501(c)(3) organization as a QCD. Typically, the tax benefit of making charitable gifts is only realized by those who itemize deductions, not for those who file with a standard deduction. However, when you make a QCD, the distribution is instead omitted from your income. This means the tax benefit from a QCD can be realized by all individuals, regardless of whether they take the standard deduction or itemize.
- Make a gift of appreciated property. A donor who contributes long-term capital gain securities or real estate receives a charitable deduction equal to the property’s full fair market value and avoids capital gains tax that would be due if the property was sold.
Doing good in your community is its own reward. But if individuals can reap tax benefits by employing these strategies, they may be more inclined to continue giving.
About the Authors:
Anthony J. Caleca CPA, CGMA, is Managing Partner of Brown Smith Wallace. Tony is the Managing Partner of Brown Smith Wallace. During his 25-year career, Tony has developed a strong background in cash flow management, family tax and succession planning, project management, staff development, financing and management consulting. Learn more…
Deborah M. Vandeven CPA, CVA is a Principal in the Tax Services group at Brown Smith Wallace. As a Principal, Debbie has overall responsibility for the tax planning and consulting services rendered to her individual and business clients. Debbie has more than 25 years of experience as an accounting professional providing expertise to a wide variety of industry groups, such as: construction, retail, health care, agriculture, manufacturing and distribution. Learn more…
If you don’t already have a fund at the St. Louis Community Foundation, now is a great time to start! A fund at the Community Foundation will help you streamline and simplify your client’s charitable giving. Contact us to learn more.