The Tax Cuts and Jobs Act (TCJA) represents the biggest overhaul of the tax code in more than three decades. Tax experts are still sorting out all the intricacies. But this much is clear: The TCJA will have a significant impact on estate planning and related aspects, such as charitable giving.
Even though the TCJA reduces tax incentives for making charitable donations for some people, it encourages contributions for others. Let’s take a closer look at the new tax landscape and how it relates to charitable giving.
Several tax law changes affecting charitable donations are intertwined with other provisions. The TCJA effectively doubles the standard deduction to $12,000 for single filers ($24,000 for joint filers) and scales back or eliminates some itemized deductions. For instance, the deduction for state taxes is limited to $10,000 annually, while the deduction for miscellaneous expenses is repealed. At the same time, individual tax rates are reduced. These changes are now in effect and scheduled to “sunset” after 2025.
Notably, the tax deduction for charitable donations is preserved. In fact, for 2018 through 2025, the annual deduction limit for cash contributions has increased from 50% of adjusted gross income (AGI) to 60% of AGI. Nevertheless, the confluence of other provisions, especially the doubling of the standard deduction, may discourage charitable intentions. Some individuals who no longer itemize deductions might forgo charitable contributions they would otherwise make. (You must itemize to claim them. However, please note that legislation has been introduced in Congress that would allow taxpayers to deduct contributions even if they don’t itemize deductions. The proposed law would also eliminate the current caps on charitable contribution deductions. Please contact your tax advisor for information about the proposal and its current status.)
Another significant change is the increased amount of the gift and estate tax exemption from $5 million to $10 million (inflation-indexed to $11.18 million in 2018). As a result of this increase, fewer individuals will have federal estate tax concerns and thus may be more inclined to use the estate tax savings to make charitable donations, subject to the restrictions stated above. A caveat: State estate taxes may apply at lower limits than the federal exemption.
Charitable techniques to consider
In this new environment, you may use one or more charitable gift techniques as part of a comprehensive estate plan. There are several potential options to consider, including:
Bunching deductions. In the wake of the TCJA, you may claim the standard deduction in some years, so charitable donations won’t provide any tax benefit. Conversely, in other years when you itemize, those deductions are valuable. Accordingly, you might bunch charitable gifts in years you expect to itemize and skip large contributions in other years.
Charitable remainder trust (CRT). This trust type remains a viable option under the TCJA. Essentially, you create a trust, funded with property such as real estate or securities, to pay out income to a designated beneficiary for life or for a term of years. The CRT generates a current tax deduction based on government tables. At the end of the trust term, the remainder goes to the charity of your choice.
Donor-advised funds (DAFs). With a DAF, you can exert more control over your charitable endeavors. First, you contribute to a fund, typically managed by a financial institution or another sponsoring organization. Next, you instruct the fund as to how to dole out the money to your favorite charities. Subsequent DAF contributions may be made in years you itemize.
Gifts of property. Instead of giving cash to charities, individuals will frequently contribute appreciated property, such as securities. If the property would have produced long-term capital gains had it been sold instead of donated, the fair market value for deduction purposes is the current value, not the initial cost. This enables the donor to claim a sizable deduction and avoid tax on the appreciation in value.
Charitable rollovers. Under a special tax law provision, an individual age 70½ or older can transfer up to $100,000 directly from an IRA to a charity without any tax consequences. The distribution is neither tax-deductible by the donor nor taxable to him or her, but can satisfy required minimum distribution (RMD) obligations. This technique wasn’t affected by the TCJA.
Charitable bequests. You can incorporate charitable gift giving into your estate plan though various bequests, establishing what is important to your legacy. This may be accomplished through various means, such as leaving a specific dollar amount or percentage of assets to charities or naming an organization as the full or partial beneficiary of a life insurance policy or other account.
Review your plan
Charitable gift giving may be a critical component of your estate plan. Take appropriate action based on the impact of the TCJA on your specific situation. Please contact our Family Wealth and Individual Tax Group if you have any questions.