Giving to Charity: Strategies to Ensure a Tax and Human Benefit Under New Tax Law

The Tax Cuts and Jobs Act (TCJA) went into effect on Jan. 1. It will take several years to figure out all of the winners and losers, but some of the obvious losers are universities, charities, churches and foundations. Basically, any organizations that offer a tax benefit for giving and, by extension, their donors.

Due to the higher standard deduction, the $10,000 cap on state and local tax deductions, and other changes, fewer than 10% of taxpayers are expected to itemize in the 2018 tax year. That’s down from 30% now. Without itemized deductions, most people will lose all tax benefits associated with charitable giving. So, the question is, how much do people care about the tax break? According to Charity Navigator, 12% of annual giving occurs in the last three days of the year. I’d say the answer is clear.

Possibilities for donors to consider

Fortunately, there are options for donors who would like to obtain a tax benefit for their generosity. One permits anyone 70½ or older to make a direct transfer of IRA balances up to $100,000 per year to a charity. For most donors, these qualified charitable distributions (QCDs) make it possible to net an ever-greater tax benefit because those dollars will never hit your adjusted gross income (AGI). Because you would have paid income taxes on that distribution, this strategy offers significant benefit to those who would have given that amount regardless. Added bonus: QCDs go toward satisfying your required minimum distribution (RMD). Bear in mind, though, that QCDs must come from IRAs; they cannot come from 401(k)s.

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Another option, charitable stacking or lumping, is quickly emerging in the nerdy financial planning circles as the charitable strategy of the future. It’s not complicated. Instead of giving $10,000 per year over five years to a charity, you would give $50,000 in one year, taking you above the new $24,000 standard deduction and thus providing a tax benefit for your contribution. I’m going to take it a step further and say you should stack your entire Schedule A. In other words, you should make charitable contributions in years when you have significant medical expenses. This may be a luxury only for well-to-do retirees, not middle-class Americans.

Donor-advised funds

Many of these “lumped” contributions will find their way to donor-advised funds, which offer an immediate tax benefit for your irrevocable contribution. Charles Schwab and Fidelity run two of the biggest donor-advised funds in the country. They can be funded through gifts of cash or (even better) appreciated securities. The money is later directed through grants to the charities of your choice. Interest in these accounts surged at the end of 2017 as people realized that they wouldn’t be itemizing in 2018. Ironically, this will likely create competition between donor-advised funds and charities, which prefer a more consistent flow of income.

While all of these things may seem like negatives for the donees, there is a silver lining for large donors. The charitable contribution cap has been expanded as a percentage of AGI. In previous years, your tax benefit was capped at 50% of AGI. For example, if you made $1 million in 2017 and donated $600,000, you’d be able to write off only $500,000. The additional $100,000 would be carried forward to future, possibly lower-income, years. Now you can write off the entire $600,000 because the cap has risen to 60%. You’re likely to see the benefit of this through the use of some type of charitable remainder trust.

The billion-dollar problem for charities

The Tax Policy Center estimated that the House of Representatives’ version of the TCJA would reduce charitable giving by $12 billion to $20 billion in 2018. That’s billion with a “B.” That estimate does not consider the likely decrease in charitable giving that will result from the doubling of the estate exemption to roughly $11 million per person. Our firm is receiving many calls from nonprofits seeking guidance for educating donors. If you work in the fundraising world, it behooves you to make such education a top priority.

In Simon Sinek’s book Start With Why? he argues that it doesn’t matter what or how a person or company does something. What really matters is why they do what they do. The why is tied to emotions, while the what and how are tied to logic. Think about why you give to the nonprofits on your list. I have seen two family members deal with Parkinson’s disease, so the Michael J. Fox Foundation is my go-to at the end of the year. Of course, I enjoy a tax benefit for donating (or at least I used to), but it is not the reason why I do it. To be honest, though, if I can deduct part of my contribution, I’m likely to write a larger check. These organizations and their donors must figure out the smartest ways to adjust to the new tax landscape so that their causes do not suffer.