More taxpayers will benefit from the higher standard deduction under the Tax Cuts and Jobs Act of 2017, so it is probable that fewer people will itemize deductions. This raises the question of whether or not 501(c)(3) organizations will see contributions decrease. CPA financial planners must develop a menu of options for their clients that continue to provide tax saving benefits while also fulfilling their philanthropic goals.
If the expectation is that people who have been charitably inclined will continue to be charitably inclined, we should revisit how the intent can be fulfilled and substantiated. If a taxpayer no longer itemizes deductions, they might think they no longer need to substantiate those deductions. However, if there is a chance that they could itemize or use methods other than cash for their donations, they should continue to obtain and retain such documentation. Publication 1771, Charitable Contributions Substantiation and Disclosure Requirements
, provides guidance for both the donor and charitable organization in an easy to understand format.
Even for the taxpayer who has not previously itemized and does not plan to itemize, there may be options more beneficial than opting for cash contributions. As of 2018, cash donations are limited to 60 percent of adjustment gross income, but that may not provide a benefit if the limitation is irrelevant. Other options include donating appreciated long-term securities or using part or all of a required minimum distribution from individual retirement accounts (not available from qualified plans) for those age 70½ or older, thereby saving income taxes in both cases.
In the case of using required minimum distributions, the distribution is made directly from the IRA to the charitable organization. While that amount is included in the taxable portion of the 1099-R, the preparer needs to reduce the taxable amount by the qualified charitable distribution (QCD). Hence, it is important to keep records whether the taxpayer itemizes or not and to avoid double dipping. If neither of these are options, cash gifts still serve the purpose of fulfilling one’s charitable intent. Taxpayer’s need to understand that different rules apply among the various strategies available.
The QCDs can be as little as $0 up to the required minimum distribution amount, not to exceed $100,000 per taxpayer. This is a page-one adjustment and an immediate benefit. Advisers must emphasize to nonitemizing taxpayers that taking required minimum distributions, depositing them in the bank, and then writing checks to charity is not saving them any income taxes. The result of lowering their page one income could have added benefits in lowering the amount of taxable Social Security as well. For higher-income filers, the QCD may also lower Medicare’s income-related monthly adjustment amount (IRMAA) by keeping income under IRMAA thresholds.
When donating long-term holdings of securities, a taxpayer transfers the holding directly to the charitable organization without having to sell it first. The deduction for donations of long-term appreciated assets is limited to no more than 30 percent of adjusted gross income (AGI) for donations to public charities and 20 percent to private foundations. Any unused charitable contribution may be carried forward for five years until used or exhausted. Planning, therefore, may include accelerating income on the tax return to take advantage of unused charitable contributions. This would require particular attention in the next several years to avoid losing any carryforward if the standard deduction is larger than itemized deductions.
One giving strategy that has been around for some time, and often used by higher-net-worth individuals, is a donor-advised fund (DAF). Donor-advised funds could be considered by those who have not reached the age of required minimum distribution. The QCD is not allowed for DAFs. It is a viable option for those wanting to donate cash, appreciated securities, restricted stock, nonpublicly traded assets, or other assets. Some DAF providers will even accept some cryptocurrencies. Regardless, the option to place several years of giving into a DAF may produce more tax benefits than would otherwise be afforded under the new tax law.
Here’s an example: A 50-year-old taxpayer makes a donation to her church of $4,000 per year over 10 years, totaling $40,000. If she has appreciated securities in her portfolio of the same value and donates them to a DAF, she would get a deduction for the fair market value of $40,000 without realizing any gains. To deduct the full amount, she would have to have about $134,000 of income because of the 30 percent limitation, or $67,000 of income if donating the same in cash. This would bump Schedule A itemized deductions over the standard deduction threshold. Along with this, she would also have other available deductions, such as mortgage interest.
The contribution continues to stay invested and somewhat controlled by the donor. The donor recommends grants to her favorite charities that have passed the screening and due diligence review of the custodian holding the DAF. Grants may be made over time, on a predetermined schedule, or all at once at a later time to one or more charities and may be subject to minimum amounts, depending on the custodian. The fund may allow multiple donors as well as other privileges that may be extended to family members and friends wishing to be involved or encouraged to embrace philanthropy. This has been a traditional consideration in estate planning as well.
With the recent Tax Cuts and Jobs Act, the federal estate tax exemption was doubled to $11.2 million per individual, which may impact charitable giving as well. An old adage often heard was that people would rather give their money to charity than to the government. If that was the incentive, then we may see less transfers of wealth during lifetime or at death because fewer people will be subject to estate taxes.
Outside of the estate tax savings, many people may wait to fulfill their charitable giving until death so that they are sure to have adequate resources during their lifetime. When a person has retirement accounts and nonqualified accounts and chooses to benefit both charitable organizations and individuals at his or her death, how those bequests or transfers are funded should be reviewed. Giving taxable accounts to nonprofits that do not pay income taxes seems obvious, but often specific dollar amounts to charity are stated in a will while retirement accounts name individual beneficiaries. Uncovering the implications of charitable giving takes time and planning.
Advising on charitable giving under the new tax law will require additional consideration of all the options that clients have. Coordinating the giving options can continue to save taxpayers money, regardless of whether or not they itemize on their tax returns. Many taxpayers believe their tax preparation just got easier, when that may not be the case at all. Ultimately, the more taxes they save, the more they have available to fulfill their philanthropic endeavors or to meet their own cash needs, and CPA financial planners need to get this message out.
Laurie A. Siebert, CPA, CFP, is an investment adviser representative of Valley National Advisers Inc., and securities are offered through Valley National Investments Inc., Member FINRA, SIPC. She is a member of the
Pennsylvania CPA Journal Editorial Board, and can be reached at firstname.lastname@example.org.