New Tax Law Is No “Gift” for Charities
Making charitable contributions can be a great way to save on taxes, but to do so you need to be careful to properly navigate the rules.
Charitable Contributions Under the New Tax LawThe Tax Cuts & Jobs Act (*TC&JA* or *Tax Act*) may not be a gift for charities, because fewer taxpayers will itemize their deductions, in part because of the higher standard deduction of $12,000 for individuals and $24,000 for married couples. This is an either/or proposition in the Tax Code. Either you take the standard deduction or you itemize*so each taxpayer has to say which makes more sense for them. Estimates are that about 21 million fewer people will itemize their deductions under the new Tax Law. See Tax Policy Center Report. That represents about a 50% drop by number, but not by amount, since charitable contributions still make sense for richer taxpayers. Another Tax Policy Center Report estimates that the marginal benefit of charitable contributions is reduced by over 5% and as much as 8-9% for the richest taxpayers, further reducing the incentives to be charitable.
Under the new Tax Law, the amount of charitable contributions you can make has increased from a cap of 50% of AGI to a cap of 60% of AGI. That is one offsetting change that may incentivize some larger earners to make bigger gifts. But, there aren*t that many taxpayers weighing whether to contribute a full 50% or 60% of their total earnings.
The Tax Policy Center estimates that the Tax Act is *likely to reduce charitable giving by somewhere in the neighborhood of 5 percent. And those gifts will come from fewer*and richer--givers.*
Federal subsidies have also been reduced by about $20 bn! This further impacts charities, which must walk a tightrope of complex 501(3)(c) rules just to keep their charitable status, and faced with increased regulatory hurdles and an expected drop in giving, charities are looking at a tough year in 2018.
Some of the suggested strategies to maximize tax savings under the new Tax Law are *bunching strategies* where charitable contributions and medical expenses for several years are *bunched* together in a single year to make itemizing make sense. But, this is essentially a version of the *spend more to save more* strategy that seems to be unwise for most. The use of donor-advised funds is another option.
What will the future of charitable gifting be under the new Tax Law. Only time will tell.
Mechanics of Documenting Your Charitable ContributionsYou need to be careful when you are making a charitable gift. Especially with the newly passed Tax Cuts & Jobs Act (*TC&JA* or *Tax Law*).
First, what*s new for charitable gifts under the new Tax Law? There is a new provision for a *Qualified Charitable Distribution* (*QCD*) which allows anyone aged 70.5 or older to donate money from their IRA directly, without it being counted as income. As most people familiar with the issue know, IRA*s have a Required Minimum Distribution (*RMD*) which must be taken on an annual basis. The QCD reduces both RMDs and the taxpayer*s Adjusted Gross Income (*AGI*).
What*s Old is New Again*
When making charitable donations, be sure to get receipts and matching bank records. The best practice is to obtain a letter from the qualifying organization together with a bank record of the payment. The record must include the name of the organization, date and amount contributed.
A lot of organizations like to throw galas, balls, golf outings and the like. The deduction is limited by the fair market value of the benefit received, which can be computed by admission tickets or comparables*so don*t be fooled into thinking that making a $1,000 *contribution* for $1,000 seats at a ballgame will be honored by the IRS*because they will see this as simply a *substance over form* situation where you call the deduction one thing, but it is really something else altogether.
For noncash contributions over $250 you need to keep a written record and acknowledgment of the donation. Goodwill provides these for each donation, for example. The receipt is required to make a good faith approximation of the value of the donated items.
Noncash donations over $500 require that the taxpayer fill out Form 8283, and failure to complete the form is likely to result in the deduction being disallowed.