Charitable Giving Under the New Tax Law

President Donald Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. While the new legislation redefined the tax brackets and eliminated personal deductions, it also changed the rules for charitable giving. Here are some of the changes you need to know in order to plan your donations appropriately for the upcoming year.

Standard Deduction

Many Americans make charitable contributions because they will receive a tax deduction. However, they only get the deduction if they itemize their taxes. The new tax act nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly.¹ This means that more people will not bother to itemize, and thus, will no longer qualify for charitable deductions.

Other Factors in Itemization

Besides the increase in standard deductions, the new tax law includes a $10,000 limit on state and local tax (SALT) deductions, the elimination of home equity loan deductions and a limit of $750,000 on mortgage interest deductions.² This is likely to reduce the number of Americans who itemize and receive deductions for charitable giving.

Limitations on Deductions

The limit on tax deductions for cash donations has been increased from 50 percent of adjusted gross income (AGI) to 60 percent. However, the limit for gifts of stock stays the same at 30 percent of AGI.³ Realistically, Americans making run-of-the-mill donations like used clothes, charity walk gift money and religious tithes will not be affected by this new rule, but it does benefit wealthier Americans who make larger donations.

Estate Tax

The 2017 tax law increases the threshold for the estate tax, meaning that more high-income individuals are exempt. As of 2018, Americans do not owe federal estate taxes on estates valued up to $11.18 million for individuals and $22.36 million for married couples filing jointly.⁴ Those affected by the tax may consider this new rule when planning their charitable giving.

Pease Limitations

Pease limitations, which limited itemized deductions for high-income Americans in the past, have been repealed. These limitations used to apply to individuals with an AGI larger than $261,500 or married couples filing jointly with an AGI larger than $313,800.⁵ Their itemized deductions were equivalent to either 1) three percent of their AGI over the federal limit or 2) 80 percent of the itemized deduction “otherwise allowable” – whichever was smaller.⁶

Your Giving Options

These new tax rules may change the way some people start to give. If you would like to itemize your deductions, consider “bunching” your deductions by donating a larger sum of money every other year. Alternatively, you can put your money into a donor-advised fund. You’re only eligible for deductions the year you add to the fund, but money can be allocated to your charities at any time, ensuring they receive a steady flow of gift money.

Legal Guidance in Michigan 

Tax reform is tricky for even the most financially savvy Americans. At the Law Offices of David L. Carrier, our estate planning lawyers can explain the laws more thoroughly and recommend the best course of action to maximize the impact of your money. If you’re interested in establishing a will or trust, planning your estate or structuring your income and finances to minimize tax liability, contact us at (616) 361-8400 today!

Sources

¹ https://www.cnbc.com/2018/01/04/bunching-charitable-donations-could-help-you-save-on-taxes-this-year.html

² https://www.forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/#731b27576334

³ https://www.forbes.com/sites/nextavenue/2018/03/15/what-the-new-tax-law-means-for-your-charitable-giving/#3242be2e4034

⁴ http://www.wealthmanagement.com/estate-planning/tax-reform-and-charitable-estate-planning-glass-half-empty-or-half-full

⁵ https://www.investopedia.com/articles/taxes/08/itemized-deductions-overview.asp

⁶ https://www.forbes.com/sites/greatspeculations/2013/01/09/pease-limitation-puts-a-lid-on-itemized-deductions-for-wealthy-folks/#57c6a157ee11