At first glance, the Tax Cuts and Jobs Act of 2017 (TCJA) had little direct impact on the tax treatment of charitable giving. Drilling down, however, it has significantly affected donation-related tax benefits. Many individuals might not be aware of how things have changed, so advisors should clarify the current situation. This article contains a list of topics to bring up in such discussions.

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Lower Tax Rates

One key aspect of the TCJA is the reduction of income tax rates, welcomed by many taxpayers. Lower rates, however, devalue all deductions, including charitable contributions. Suppose, for example, Alice contributes $1,000 to her favorite charity. Under prior law, Alice was in the 28% tax bracket. Her $1,000 deduction saved Alice $280 in tax, so her true cost was $720. With similar income, Alice might be in the 24% tax bracket now, so that same $1,000 saves Alice only $240 in tax, and her after-tax cost rises from $720 to $760. For roughly the same after-tax cost, Alice might donate only $950 to this charity rather than $1,000. These numbers might seem minimal, but people making larger donations may have to scale back substantially to hold down the after-tax cost of their charitable giving.

Fewer Itemizers

Unlike Alice, many taxpayers will see the after-tax cost of a $1,000 donation rise from, for example, $650 or $720 or $750 to $1,000—that is, their donations will receive no tax benefit at all. This could happen to taxpayers who choose to take the standard deduction rather than itemizing. The TCJA raised the standard deduction and restricted itemized deductions, especially the one for state and local taxes (SALT). For years, approximately 30% of taxpayers (mainly those with higher incomes) itemized their deductions; starting with 2018 tax returns, it is estimated that only 10% will itemize. Taxpayers might not realize that taking the standard deduction means they will not itemize and therefore will not receive any tax benefit from their charitable contributions.

Qualified Charitable Distributions

Overcoming the lack of itemized deductions for charitable contributions might be easiest for taxpayers age 70½ and older, as they are eligible for qualified charitable distributions (QCD), up to $100,000 per person per year, from their IRAs to charity. These QCDs will not be tax deductible, but they will count toward required minimum distributions (RMD).

For example, suppose Jan, age 74, has $850,000 in her traditional IRA. Her RMD this year is about $36,000. If Jan makes a QCD of $25,000 to her favorite charity, her remaining RMD would be only $11,000. She has reduced her income by $25,000, effectively getting a tax deduction for the QCD. Indeed, reducing her adjusted gross income (AGI) by $25,000 may create greater tax savings than a $25,000 itemized deduction, due to various tax code provisions.

Bunching Donations

Taxpayers younger than 70½ who do not itemize deductions will have to find other ways to receive charitable tax benefits. One possibility is to bunch donations together every few years in order to benefit from itemizing in the donation years. Suppose, for example, that Brad, age 50, expects to pay no mortgage interest and have no deductible medical expenses each year. His only itemized deductions would be state and local taxes (SALT) paid (capped at $10,000 a year) and $10,000 of charitable donations, for a total of $20,000. Brad and his wife Dee will take the $24,400 standard deduction on their joint tax return in 2019, so they will not itemize.

Instead, they might donate $30,000 to a donor-advised fund in 2019. Together with a $10,000 SALT deduction, they would receive $40,000 of itemized deductions in 2019. During the next two years, they refrain from making charitable contributions. Assuming the standard deduction remains at $24,400, their deductions for 2019 through 2021 would be $40,000 (for 2019) + $24,400 (for 2020) + $24,400 (for 2021) = $88,800. Taking the standard deduction all three years would save them only $24,400 × 3, or $73,200, so they would receive some tax benefit from this arrangement. Meanwhile, after their $30,000 contribution in 2019, they could spread out donations from their donor-advised fund over those three calendar years so that the charities are not adversely affected by this bunching approach.

Corporate Donations

Regular C corporations can deduct charitable contributions of up to 10% of their taxable income each year, regardless of whether shareholders itemize deductions. Thus, owners of C corporations can receive some tax benefit from contributing to charity, even though the reduced 21% corporate tax rate limits the value of such a contribution.

Business owners operating as sole proprietors or via pass-through entities will report business charitable donations on their personal returns. Again, they can receive a tax benefit only by itemizing. If the payment to charity has a valid business purpose (e.g., advertising in a charity’s publication), freelancers and owners of pass-through entities might legitimately claim a deduction for a business expense.

Estate Planning

Current law provides that charitable bequests are deductible from the decedent’s estate, which might reduce estate tax. With a current exemption of $11.4 million, however, few people will owe the federal estate tax, and thus few estates would receive a deduction from a charitable bequest.

Instead, people who intend to make charitable bequests might accelerate their giving and make lifetime donations. After age 70½, the donations can be QCDs, with the tax benefits explained previously. Younger people could front-load donations, making them large enough that itemizing makes sense.

Another tactic to consider is to make charitable bequests from an IRA at death; this could permit larger bequests of other assets to heirs. Even if heirs will not have to be concerned with federal estate tax, they still could enjoy income tax advantages if they inherit fewer IRA dollars and more appreciated assets with a step-up in basis.

Taxpayers might not realize that taking the standard deduction means they will not itemize and therefore will not receive any tax benefit from their charitable contributions.

Donations of Securities

Since the stock market chaos of 2008–2009, equity values have broadly increased. Investors may be holding appreciated stocks and stock funds in taxable accounts; in this case, donating some appreciated shares to charity, rather than giving cash, may be a tax-effective tactic.

For example, suppose Jim donates $20,000 to his alma mater every year. In the past, he has written checks for the contributions. In 2019, Jim donates $20,000 worth of stocks that he bought years ago for $5,000. Assuming Jim would owe 15% tax on a $15,000 long-term capital gain, the tax bill on a sale would be $2,250; thus, those shares are actually worth $17,750 to Jim, in terms of cash. By donating the shares to his alma mater, Jim is receiving the tax benefit of a $20,000 charitable contribution, even though he is relinquishing assets worth $17,750 after tax. The college, as a qualifying charitable organization, can sell the donated shares and keep the full $20,000. Meanwhile, no one ever pays tax on this $15,000 long-term capital gain.

Note that this strategy makes sense only if the donor will itemize deductions; the larger the donation, the greater the itemized deduction, and the more tax benefit from the charitable contribution. Therefore, it may make sense to contribute a large amount of appreciated securities in one year to a donor-advised fund, take a large upfront tax deduction, and then spread the contributions to a charity or charities over multiple years.

To donate shares to charity, an investor should contact the financial firm or mutual fund company holding the shares to get the required transfer form. It is also a good idea to notify the charity that shares are on the way, providing the security’s name, the amount being transferred, and the donor’s address for an acknowledgment.

Donating securities that have lost value is not a good idea. It is usually better to sell the shares at a loss and donate the cash from the sale. The capital loss can be valuable, either as a current tax deduction or as an offset to realized capital gains in the year of the sale or in the future.

Charitable Remainder Trusts

A charitable remainder trust (CRT) can be funded with many types of assets, but appreciated securities are frequently suggested. Once the assets are in the trust, income beneficiaries (often the donor or the donor and spouse) receive a stream of cash flow, perhaps for life. After the payout period from the trust to the income beneficiaries has expired, the remainder goes to a named charity or multiple charities.

As is the case with any donation of appreciated securities, a transfer to a CRT generates current tax benefits. There is no upfront capital gains tax on the asset appreciation. In addition, the donor will receive a tax deduction; the larger the income stream and the more time until the expected donation to charity, the smaller the deduction (as a percentage of the donation).

As is the case with any donation of appreciated securities, a transfer to a CRT generates current tax benefits. There is no upfront capital gains tax on the asset appreciation. In addition, the donor will receive a tax deduction; the larger the income stream and the more time until the expected donation to charity, the smaller the deduction (as a percentage of the donation).

Checklist for Charitable Tax Savings under the Tax Cuts and Jobs Act of 2017

  • Will I be itemizing deductions? Taxpayers who claim the standard deduction will receive no deduction for charitable contributions.
  • Is the donation going to an IRS-recognized charity?
  • Do I have to substantiate the donation? This may include obtaining written acknowledgments from the charity and qualified appraisals.
  • Is my donation over the (new) AGI cap? Under the TCJA, cash donations generally are limited to 60% of AGI, up from 50% under prior law.
  • Am I older than 70½? If so, I might consider using untaxed qualified charitable distributions (QCDs) to replace taxable required minimum distributions (RMDs).
  • Am I younger than 70½? If so, I might consider bunching charitable deductions in a given year in order to benefit from itemizing.

Because of the time and legal fees involved in setting up a CRT, the amount used to fund the trust is typically substantial, so a sizable charitable contribution may be calculated. Often, the tax deduction will be large enough to support itemizing.

Charitable Lead Trusts

A charitable lead trust (CLT) can be seen as the reverse of a CRT. Once the trust is funded, payouts will go to one or more designated charities. At the end of the trust term, the remaining CLT assets can go back to the donor (the trust grantor) or to other individuals, including family members.

The key tax benefit here is the large initial tax deduction. This deduction might offset income tax if the trust assets eventually pass back to the grantor, or reduce gift or estate tax if they go to other individuals. In either case, the amount of the deduction will be the present value of the promised contributions over the term of the trust to charity.

Charitable Gift Annuities

Many charities and other nonprofit organizations offer charitable gift annuities (CGAs). In these arrangements, a donor makes a contribution and receives a stream of income that can last the lifetime of an individual or the lifetime of a married couple’s surviving spouse. Payout rates are often set using tables from the American Council of Gift Annuities and vary by the age of the donors. For example, suppose that Carol and Greg, both age 65, fund a gift annuity with $100,000. The relevant table shows a 4.5% payout rate; therefore, they will receive $4,500 (4.5% of $100,000) a year as long as either spouse is alive. They will also receive a partial return of principal with every payment from the charity, so the annual $4,500 of income will be partially tax-free. Assuming they funded the CGA with appreciated securities held more than one year, some of the taxable portion of this income probably will be taxed at favorable long-term capital gain rates.

In addition, they will receive an upfront tax deduction for their charitable contribution in the year they purchase the CGA. Because they donated appreciated securities held longer than one year, their charitable contribution deduction will be based on the full $100,000 market value of those assets. This deduction must, however, be reduced by the portion of the gift, determined by an actuarial computation, representing the present value of the total annual income payments received from the CGA.

Conservation Easements

Besides cash or securities, other types of charitable donations can qualify for tax benefits. For example, a landowner might donate a conservation easement to a conservation group. The donor could pledge that certain forms of development will not be permitted in perpetuity. Such an easement might reduce the land’s value on a future sale. For example, Kim owns a property worth $3 million, but the easement donation reduces the value to $2 million. Kim might claim the $1 million loss of value as a charitable contribution tax deduction.

Claiming such a deduction does, however, carry risks. IRS Notice 2017-10 deals with syndicated conservation easement transactions, which are sponsored by promoters who arrange for multiple investors to buy property, donate an easement, and claim a tax deduction inflated by questionable appraisals. The IRS warns that such practices may lead to disallowed deductions. Anyone interested in donating a conservation easement should be sure to obtain a realistic valuation from a reputable appraiser.

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink, LLP and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of the NYSSCPA Hall of Fame and was awarded the Society’s Outstanding CPA in Education Award in May 2015. He is also a member of The CPA Journal Editorial Advisory Board.
James R. Grimaldi, CPA is a partner at Citrin Cooperman.