The Tax Cuts and Jobs Act (TCJA) is the most sweeping tax reform in decades. When it took effect on January 1, 2018, it changed many things we have come to take for granted about taxes and tax deductions in this country. One of those is the relationship between taxes and donations to charity. Here's a look at how the TCJA impacts charitable giving.
Taxes, by and large, accomplish two things: generate revenue and drive behavior. For instance, people may be motivated to purchase homes because they can deduct mortgage interest from their taxable income, while rent paid is not tax deductible. Similarly, people may donate money to charity not just because they want to do good, but because donations to qualifying charities are tax deductible.
That's not to say that people donate only because of a tax deduction. Some people would donate even if there were no deduction, and some people wouldn't donate no matter what incentive they were given. But in between, there is a large sea of people who are inclined to donate, and for whom a tax deduction is a powerful motivator. How has the TCJA changed that?
To understand how the TCJA impacts charitable giving, it's important to understand the fundamental changes the Act has made in how people will file their taxes. One significant change is the elimination of personal exemptions and the near-doubling of the standard deduction. In 2017, the standard deduction for a single taxpayer was $6,350. In 2018, it is $12,000. For a married couple filing jointly, the standard deduction is $24,000.
In the past, people who were inclined to donate to charity might have found that they could deduct more from their taxable income if they made donations and itemized their deductions rather than just taking the standard deduction. Now, with the increased standard deduction amounts, many people may find it less worthwhile, and more burdensome, to itemize their deductions. If they are not itemizing deductions, they receive no income tax benefit from charitable donations—so they may not make them.
Another notable feature of the TCJA is that it cuts tax rates for most people (though not all of them). The result is that charitable giving becomes more costly, even for those who continue to itemize. To illustrate, if a married couple donates $10,000 to their favorite charity annually, the after-tax cost of their annual donation will increase. If, prior to the TCJA, the couple was in the top tax bracket of 39.6%, the cost of the donation, after tax, was $6,040. The TCJA has placed them in the 35% tax bracket. The same $10,000 donation now costs them $6,500 after tax.
Just how big is the impact of the TCJA on charitable giving? Unfortunately for charities, the answer appears to be: pretty big. The nonprofit Tax Policy Center estimates that the TCJA will cut in half the number of households itemizing deductions for charitable donations. The organization estimates a drop from 37 million taxpayers who itemized in the most recent tax year to approximately 16 million expected to itemize under the TCJA.
Put another way, in 2016, Americans donated about $390 billion to charities. Seventy-two percent of that amount came from individual donors, with the remainder coming from corporate grants, foundations, and bequests. How many of those individual donors itemized? Eighty-two percent. And over twenty million of those taxpayers will not be itemizing charitable donations this year.
The likely outcome is a steep decline in charitable giving in the United States, estimated by the Tax Policy Center to be a reduction of between $12 and $20 billion. Obviously, this will have a great impact on many charities—perhaps one that is important to you and your family.
As you can imagine, many charities are dreading the effect of this change in the tax laws. If you have donated to charities in the past and itemized deductions on your income tax return, you may be looking at a change. Do you want that change to have a negative impact on organizations you care about?
If not, there are other ways to give to charities that you value. Your estate planning attorney can help you establish a charitable remainder trust, which would allow you to make gifts during your lifetime if you chose, with the remainder of trust assets going to the charity upon your death.
Another option, if you are older than 70 1/2, is to initiate a direct rollover from an Individual Retirement Account (IRA) to a qualified charity. Each individual taxpayer may roll over up to $100,000. Again, an attorney experienced in estate planning and planned giving can help you put this mechanism in place.
If you have questions about how the new tax law will (or should) impact your giving, we invite you to contact our law firm to schedule a consultation. We will work with you to maximize your tax benefit as well as the benefit to charities you care about.
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