Wealth Planning Update - Reassessing Charitable Giving Under 2017 Tax Reform Legislation - The Private Bank - Wells Fargo

In this Wealth Planning Update:

  • Tax reform legislation may affect how individuals make charitable contributions and the amount they give.
  • Unless charitable giving is carefully planned, many individuals will no longer receive a tax benefit for their charitable contributions.
  • By carefully considering how you give and when, you may have an opportunity to fulfill your charitable intent and still receive a tax benefit for your charitable contributions.

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Since the passage of tax reform legislation in late 2017, many taxpayers have focused on how it affects small business owners and large corporations. However, much less attention has been given to how it impacts the charitable giving of individuals and families and their favorite nonprofit organizations.

Prior to the passage of tax reform, many of the most significant charities and their industry representatives lobbied against the legislation for fear that it might reduce charitable giving. But those effects have yet to be seen as many individuals are still uncertain about how tax reform might affect their own charitable giving habits, if at all.

How does tax reform affect an individual’s ability to deduct charitable contributions?

  • Charitable contributions of cash to public charities – including donor advised funds – are now deductible up to 60% of a donor’s adjusted gross income, effective for contributions made on or after January 1, 2018. Under prior law, the deductibility of these contributions was limited to up to only 50% of adjusted gross income.
  • The legislation repeals the “Pease Rule,” which reduced the value of itemized deductions for high-income taxpayers. This is a positive for high-income donors who may have lost some or a significant amount of their charitable contribution deduction due to the rule.
  • The law repeals charitable deduction for gifts made in exchange for college athletic event seating rights. Previously 80% of the seating rights were deductible, but under the tax reform legislation, there is no longer a charitable deduction.

Why might an individual reduce their charitable giving in light of the tax reform legislation?

Due to some key changes, fewer individuals may elect to itemize their deductions and, instead, will use the standard deduction. As a reminder, if a taxpayer doesn’t elect to itemize, that individual will not receive a tax incentive to make a charitable deduction.

So, how many individuals will lose the tax incentive to make charitable contributions? The nonpartisan Tax Policy Center estimates the number of households claiming an itemized deduction for their gifts to charitable organizations will drop from about 37 million to about 16 million in 2018.1

Of course, not all charitable contributions are made because of the corresponding tax deduction. In fact, the tax benefits of a charitable contribution play only a small part in a potential donor’s decision to make a charitable gift. The 2016 U.S. Trust Study of High Net Worth Philanthropy revealed that only 18% of the high-net-worth donors surveyed stated that they gave primarily because of the tax benefits. But the loss of a tax benefit will still likely have an effect.

What are some of the key changes that may affect my decision to take the standard deduction or to elect to itemize?

  • The standard deduction nearly doubled to $24,000 for married filers and $12,000 for single filers. Under 2017 tax laws, a family of four could reduce its adjusted gross income by $16,200 for its personal exemptions and another $12,700 for the standard deduction (a total of $28,900). Under the new law, this same family could reduce its adjusted gross income by only the $24,000 standard deduction, unless it has itemized deductions in excess of that amount.
  • The deduction for the sum of state and local property taxes and income taxes (or sales tax in lieu of income tax) is capped at $10,000.
  • The mortgage interest deduction limit on qualified acquisition debt is reduced from $1 million to $750,000. This means interest is deductible on loan balances up to $750,000 used to buy, build, or improve a primary home or one second home.

What can I do to receive a charitable deduction for my donations to qualified organizations?

  • For taxpayers who are charitably inclined and over age 70½, it will be important to evaluate whether it is more beneficial to contribute cash or stock or to make a qualified charitable distribution from an IRA. Qualified charitable distributions from IRAs are not includible in the donor’s gross income and do not qualify for the charitable contribution deduction. The best strategy will not be the same for everyone.
  • Some taxpayers may want to consider “bunching” charitable contributions into alternate years with a view to qualifying for itemization at least some of the time. Bunched gifts to donor advised funds might be another way to accomplish this goal. However, the cash flow impact on the taxpayer and the charity should be considered.
  • Business owners whose business is organized as a C corporation might consider making their charitable contributions directly from the business to the charitable organization. Charitable contributions by a C corporation are treated as a business expense and are not subject to any limitations.

Summary

With the passage of tax reform, taxpayers should reassess how their personal and business affairs are organized, including how they have made charitable contributions in the past. With only a small percentage of taxpayers continuing to itemize their deductions each year, individuals should take a fresh look at how they can continue to fulfill their charitable intent and still receive a tax benefit for their contributions through careful planning.

For additional information, ask your Relationship Manager to introduce you to a member of your Regional Wealth Planning team to discuss charitable giving strategies that may fit your specific situation.

1 http://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

Authors: Jeffrey McClean, Senior Wealth Planning Strategist and Bill Bardwell, Philanthropic Solutions Strategist