The 2017 Tax Act, passed into law in December, is one of the most complicated new laws in tax history. In addition to changes that affect individuals and businesses, there are also noteworthy changes that will impact charitable giving.
Smart Business spoke with Karen S. Cohen, CPA, vice president and trust officer at Home Savings Bank, about how the new law is expected to impact charitable giving.
How is the act’s passage affecting charitable giving and planning?
In 2018, married couples will have a standard deduction of $24,000. Itemized deductions are now limited mainly to taxes, mortgage interest and charitable contributions. The first $10,000 of deductions may be absorbed by the state, local and real estate tax deductions. That means the charitable contributions and mortgage interest together would need to exceed $14,000 to make itemizing deductions attractive.
Because of this, many advisers suggest ‘bunching’ deductions — giving big enough amounts to actually get a tax benefit in one year and then taking a year or two off from giving. That way, the average total of gifts is the same, but there is a tax benefit for at least some of what was given to charity.
Others have recommended opening a donor-advised fund with a community foundation. The donor makes a big enough gift in one year to benefit from the tax deduction, and then allows the community foundation to manage and distribute donations to charities over time.
What should donors consider in developing their giving strategy?
Consider giving appreciated publicly traded securities to charity instead of cash. When giving stock, the donor doesn’t have to pay capital gains tax in order to turn the stock into cash. The charity gets more, as the donor doesn’t have to hold back money to pay taxes on the stock sale, and charities don’t pay tax when they liquidate the stock.
Another option is direct gifts to charity from an IRA. Donors can give up to $100,000 per year that way, so long as they are age 70-1/2 or older. The IRA withdrawal is not taxable to the donor, which keeps the donor’s total taxable income lower for the year. Because the withdrawal is not included in income, there is no need for an offsetting charitable contribution deduction.
Another option, which might be revived by the increasing interest rates, is the use of split-interest trusts. Older individuals who have highly appreciated assets can benefit from a charitable remainder trust. They would receive an income stream from the trust for the rest of their lives and whatever is left in the trust would pass to charity when that donor passes away.
What are some ways larger charitable donations can be managed?
When someone has a large taxable event in his or her life — the sale of a business, vacation home, or commercial real estate — thoughts often turn to making a large charitable gift to help offset the taxable impact of the sale. Donors should consider setting up a private foundation, which will allow the family to invest the large contribution and make meaningful annual distributions to other charities over the foreseeable future and often in perpetuity.
However, in the past 10 years there seems to have been a move away from funding private foundations. Private foundations require legal work to set up, have stringent rules about required annual distributions, are assessed an excise tax on investment income, and gifts have more limited deduction thresholds than gifts to public charities. Private foundations have to file a tax return each year with the IRS and, in Ohio, pay an annual fee to the state.
Donor-advised funds, on the other hand, have none of that complexity or administrative burden. Donors make a gift to open the fund, sign an agreement that spells out what should happen to the money, then the sponsoring organization — the community foundation — carries out the wishes. Donors can continue to advise each year about what distributions they would like to have made and where.
Donors should make sensible and mindful choices when they make charitable gifts. Getting good, one-on-one advice from a trusted accountant before committing to a large transaction will help make those choices easier.
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