Philanthropy After the 2017 Tax Act

The long-term impact on philanthropy of the Tax Cuts and Jobs Act of 2017 remains unclear. While lower income taxes and eased income tax administration would seem to be desirable ends, one area that has raised concern is the effect these changes have on charitable giving, and the services that charities will be able to provide to their communities as a result.

The good news is that there is a significant disconnect between income tax laws and actual behavior. In other words, although individuals want tax efficiency, they are not primarily motivated to give to charity for tax or financial reasons.

The following is an overview perspective on the most effective ways to give to charities going forward.

Practical Implications Arising from the 2017 Tax Act — “Bunching, Boosting, and Bypassing”

For those who will be affected by the higher standard deduction, and who still want to make tax-efficient donations to their favorite charities, they should consider the technique of “bunching” deductions. For example, making three years of charitable giving every third year, itemizing tax deductions in that year and then using the standard deduction in the non-itemizing calendar years. This strategy could be accomplished by giving directly to charities, or through a gift to a donor-advised fund.

A similar strategy is to “boost” gifts by fulfilling larger gift commitments to a single charity in a single year, rather than over an extended pledge-payment period. A variation is to accelerate charitable bequests into lifetime charitable gifts, since there will probably be no estate tax concerns due to the higher federal estate tax exemption.

Donors can enjoy a “deduction equivalent” by making gifts that “bypass” their income stream. A technique that has gained popularity is the use of qualified charitable distributions (QCD). An individual over age 70 1/2 can direct up to $100,000 a year directly from their IRA to one or more qualifying charities, or to a designated fund (a QCD cannot be made to a donor-advised fund). A QCD does not result in a federal income tax charitable deduction, but the distributed amount does not have to be reported as income in the same manner as a regular IRA distribution. Thus it is equivalent to a 100% income tax deduction. The distribution will also count against the required minimum distribution. This strategy may keep the individual out of higher marginal tax brackets and away from the 3.8% Medicare surtax. In short, there will be no penalty for not itemizing deductions and still making charitable contributions using a qualified charitable distribution.

Giving Opportunities that Continue to Exist After the Tax Act

Gift Appreciated Assets: Congress did not change the rules with regard to the gift of appreciated assets to charities. An individual still can receive substantial income tax benefits from donating stock and other appreciated assets that have grown sharply in value to a charity. The individual will avoid the capital gains tax that would have been incurred had he/she sold the appreciated asset while the gain in the asset’s value is fully tax deductible.

Donor Advised Funds: Donor advised funds could be used to receive a large, deductible gift in one calendar year (bunching), yet the funds can be distributed to charities over the next several years (albeit with no income tax deduction in those future years). That large charitable gift can result in itemizing income tax deductions for the year of the gift to the donor advised fund.

Gift of Remainder Interests in Homes and Farms: An individual can gift the remainder interest in their principal residence or a farm to a charity and receive a large current income tax charitable deduction (bunching) for the value of that gifted remainder interest. This is a way to bunch a large charitable gift into a single calendar year, permitting itemization of that large charitable gift while allowing the individual’s use of the home until the individual’s death. Practically speaking, the charitable gift actually takes place on the individual’s death, but the individual claims a current income tax charitable deduction.

Charitable Gift Annuities: Charitable gift annuities are still viable and often used when the individual wants to help a charity but is still fearful of outliving his/her money. The charitable gift annuity avoids paying capital gains taxes on the sale of an appreciated asset like securities.

Charitable Remainder Trusts: Charitable remainder trusts (annuity or unitrust versions) will continue to be useful. A charitable remainder trust  avoids paying any capital gains taxes when an appreciated asset transferred to the trust is sold by the trust, assures a lifetime income stream to the beneficiary to address longevity concerns,  protects the trust’s assets from the beneficiary’s creditors, creates a large current charitable income tax deduction (bunching) equal to the value of the charitable remainder interest in the trust, and assures the charity that it will receive the balance of the assets in the trust on the beneficiary’s death.

Only time will tell if the 2017 Tax Act will result in reduced charitable giving. Hopefully not, if the economy remains strong and the S&P 500 continues to increase and individuals remain passionate about supporting their favorite charities. Regardless of the method, making charitable contributions to our favorite charities makes us feel good inside and truly happy that we are able to make a positive difference in the world.

Disclosure: The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.