For years, charitable givers have benefited from tax breaks that provided them with extra incentive to donate substantial amounts to charities of their choice. With the passage of the Tax Cuts and Jobs Act (TCJA), however, that incentive has been reduced for many taxpayers. While most people who give do so because they believe in the causes to which they’re contributing, it’s important to recognize the potential tax impact in light of the new rules.
Know the ins and outs
Keep in mind that the changes are scheduled to expire at the end of 2025. Here are two ways the TCJA may impact your charitable giving through December 31, 2025 (the scheduled expiration date for most of the TCJA’s individual income tax provisions):
1. Tax rates lowered. The TCJA cuts tax rates for most (but not all) people, making charitable giving more expensive. Suppose, for example, that a married couple donates $10,000 to charity each year. In 2017, they were in the 28% tax bracket, so the after-tax cost of their donations was $7,200. Now, the rate for that bracket is only 24%, increasing the after-tax cost of their donations to $7,600. (The cost of giving will be even higher if they no longer benefit from itemizing deductions.)
2. Standard deduction raised, itemized deductions limited. Changes to standard and itemized deductions also may increase the cost of charitable giving for some taxpayers. The TCJA nearly doubles the standard deduction, to 2019 inflation-adjusted amounts of $12,200 for single filers and $24,400 for married couples filing jointly. In addition, it reduces or eliminates many itemized deductions. For example, it limits deductions for state and local taxes to $10,000. And it eliminates miscellaneous itemized deductions subject to the 2% of adjusted gross income (AGI) floor, such as unreimbursed employee expenses.
Itemizing provides a tax benefit only when itemized deductions exceed the standard deduction. The TCJA changes mean that many more taxpayers will be taking the standard deduction rather than itemizing, and thus won’t enjoy a tax deduction for charitable giving. For example, let’s say a married couple has $7,000 in deductible mortgage interest expense, is limited to $10,000 in deductions for state and local taxes, and has no other itemized deductions besides charitable donations. The $24,400 standard deduction means they’ll receive no tax benefit on their first $7,400 in charitable donations.
Boost benefits by Bunching
One way to boost the tax benefits of charitable giving is to “bunch” your donations into alternating years. Suppose the couple in the example above ordinarily donates $6,000 per year to charity. They can enjoy additional tax savings by donating $12,000 every other year instead. So, for example, they might claim the standard deduction ($24,400) this year and take $29,000 in itemized deductions next year ($10,000 in state and local taxes, $7,000 in mortgage interest and $12,000 in charitable donations). This strategy generates an additional $4,000+ in deductions over a two-year period. (The exact amount will depend on the standard deduction in 2020.)
If you do itemize, keep in mind that the TCJA increases the limit for cash gifts to public charities and certain private foundations from 50% to 60% of your contribution base —generally, AGI. Other contributions continue to be limited to 50%, 30% or 20% of AGI, depending on the type of property donated and the type of charitable organization. As before, excess contributions may be carried forward up to five years.
Revisit your estate tax plan
The TCJA doubles the gift and estate tax exemption for deaths and gifts after December 31, 2017, and before January 1, 2026. For 2019, the inflation-adjusted exemption is $11.4 million ($22.8 million for married couples).
As a result, for most taxpayers there’s currently no need to consider charitable giving as a strategy for reducing gift and estate taxes. Nevertheless, if you’d like to leave a charitable legacy, you still may want to include charitable giving in your estate plan. And there can be other tax benefits in certain circumstances.
Give with eyes open
Clearly, giving to your favorite charity is satisfying on many levels, and receiving tax breaks is just one of them. By understanding the impact of the new tax rules on giving, you can set up a giving plan that benefits everyone involved. Your Belfint advisor can help you determine the best strategy to achieve your goals