Tax Reform's Hit on Charitable Giving
The tax man gives and the tax man takes away. Or, more accurately said, Congress does so.
Certainly, this is true as it pertains to charitable giving and the effect on same of the tax reform occurring in recent times.
Here is a look at some of the provisions of the Tax Cut and Jobs Act (TCJA) and how they affect those with charitable intentions from a tax standpoint.
Perhaps the change that potentially affects the largest number of people is the overall increase in the tax standard deduction. While the increase may be a positive overall, it also could mean that your charitable donations effectively yield no tax benefit for you, at least when it comes to your federal tax liability.
You see, for there to be any tax-saving benefit, your itemized deductions, including your charitable donations, must exceed the standard deduction applicable to you. TCJA significantly increased the standard deduction amounts. For 2019, the standard deduction for married filing jointly taxpayers is $24,400. Likewise, it is $18,350 for head of household filers, and $12,200 for single and married filing separately filers.
Since you can only deduct charitable donations if you itemize deductions on your return, if the total of all your itemized deductions falls below the applicable amount, the deductions will not benefit you on your federal return (but still could on your state return).
Another change affects those how make donations to college and university athletics in exchange for which they receive priority seating consideration in purchasing tickets to athletic events.
At one point, such donations were 100 percent deductible just like any other donation to a qualified charity. Several years back, the IRS attempted to disallow completely such deductions by regulation. However, Congress weighed in on the matter, striking a compromise between the IRS and taxpayers, by making them 80 percent deductible if:
ï The payment was to or for the benefit of a college, and
ï The payment would be treated as a deductible charitable donation except for the fact that the payment entitled you to receive (directly or indirectly) the right to buy tickets to athletic events of the college.
TCJA, however, came down hard on these by completely eliminating deductions under these arrangements on a permanent basis, much to the chagrin of major universities and their benefactors everywhere.
On a positive taxpayer note, at least for those who still itemize deductions despite the increased standard deduction, TCJA increased the charitable deduction limit as measured by adjusted gross income (AGI).
Under prior law, deductions for cash contributions to public charities and certain private foundations were limited to 50 percent of your AGI. TCJA increased the deductible limit to 60 percent of AGI through the year 2025. Deductions that are disallowed by the 60 percent rule can generally be carried forward five years for possible future deduction.
Because of the changes noted above, an increasingly popular giving strategy commonly referred to as a qualified charitable distribution (QCD) is more valuable than ever for those that qualify. A QCD can be used by an IRA owner over the age of 70 Ω, to satisfy their IRA required minimum distribution requirement by having the IRA distribution go directly to a qualified charity.
Effectively, the charitable contribution is made without having to include the IRA distribution in taxable income as you would otherwise have to do. This can result in significant tax savings for the charitably minded, whether or not they itemize deductions. It can also be an effective estate planning technique.
The particulars of using a QCD will be explored more in depth in my next column appearing in two weeks, including how to qualify and a full explanation of the benefits, so be sure to watch for that if you or someone in your family are of an age that it could benefit (or will be in the next few years).
For now, to show you how effective it can be, consider a recent client of mine who derives a significant amount of his taxable income from his IRA, and contributes on average $13,000 to $15,000 a year to charity. Under TCJA, he likely will not qualify to itemize deductions in the future. By using QCDs to fund his charitable endeavors, we will be able to reduce his federal tax burden an estimated $2,800 to $3,300, well worth the little bit of extra paperwork it will take to pull it off.