Changes to tax laws raised concerns for both charities and donors. Here, experts help you navigate the new rules.
At the University of Florida, charitable giving supports everything from scholarships for first-generation college students to research for disease cures. For many in the nonprofit sector, and for those who benefit from the generosity of donors, changes in the tax laws for 2018 raised concerns.
In a nutshell, the “Tax Cuts & Jobs Act” almost doubles the standard deduction Americans claim when filing their taxes, raising it from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly.
Why this matters to charities? The increase in the standard deduction means fewer Americans are likely to itemize their taxes. Fewer itemizers means fewer people benefiting from the charitable tax deduction. Without that benefit, millions of Americans, particularly those who give between $2,000 and $20,000, may lose some financial incentive to give.
Fortunately, said Paul Caspersen, Assistant Vice President and Senior Philanthropic Advisor with University of Florida Advancement, the final version of the law preserved in some form the “big three” itemized deductions — charitable deductions, mortgage interest, and state and local taxes.
Caspersen said the legislation also presents some new opportunities. “There are plenty of options for effective tax planning for those who are charitably minded,” he said.
We asked Caspersen and Alex Cobb, Director of Gift Planning, to share some options for UF donors. Please note: Their advice is not meant to replace the counsel of a personal financial advisor.
— Nicole Neal
How do I know whether I can use my charitable gifts as deductions in 2018?
Caspersen recommends you calculate the amount of charitable gifts you would need to make annually in order to reach the new itemized number for the tax year.
The general formula is simple:
New standard deduction ($12,000 single/$24,000 married) – mortgage interest – the lesser of state and local taxes (or $10,000) = the amount of charitable gifts needed to justify itemizing your deductions instead taking the standard deduction.
For example, in 2018 Tom and Sarah Miller (married, filing jointly) have $8,000 in mortgage interest, pay $7,000 in property taxes and $5,000 in state income tax, and typically donate $10,000 per year to charity.
$24,000 – $8,000 – $10,000 = $6,000. Thus, $6,000 or more in charitable gifts would justify Tom and Sarah continuing to itemize and use their charitable deductions.
I am a donor who gives less than $2,000 per year to several charities. Will I be affected?
Donors who give in this range were generally not itemizers before 2017 and won’t likely be itemizers in 2018, Caspersen said. “Most give because it feels good,” he said. These donors are often better off taking the standard deduction, “especially now that it has doubled in 2018,” he said.
I am a donor who gives $5,000 per year to several charities. With the higher standard deduction, I don’t think I will continue to itemize. Are there other ways I can give my annual gift and see a tax benefit?
Yes, there are two simple ways to continue to see a tax benefit for a donor of your contribution level, said Cobb. First, donors should consider gifting appreciated stock or other appreciated property. When you gift appreciated property, you deduct the full value of your contribution, like a gift of cash. However, even if you do not itemize, you still avoid being taxed on the long-term gain for gifts of property held at least one year. With the recent growth of the stock market, avoidance of gain can be a huge tax benefit for many donors.
Another idea is to “bundle” your gifts from multiple years into one year.
For example, in 2018 Ray and Diane Smith have $8,000 in mortgage interest, pay $7,000 in property taxes, and typically donate $5,000 per year to charity and have done so for the past 4 years.
$24,000 (standard deduction) – $8,000 – $7,000 = $9,000. Therefore, $9,000 or more in charitable gifts would justify Ray and Diane continuing to itemize their charitable deductions. Unfortunately, Ray and Diane would not see a tax benefit from their $5,000 gift. Therefore, instead of their usual $5,000 per year to charity, Ray and Diane may want to consider donating $20,000 every 4 years. “In this case,” said Cobb, “Ray and Diane would itemize in the year of the larger contribution and then continue to use the standard the next three years.” The couple would not need to increase their overall commitment to charity, he said, rather just “bundle” these annual gifts into one year when there is a tax benefit.
I am a donor who gives more than $20,000 per year to several charities. Will I be affected?
Major gift donors (greater than $20,000 per year) will likely continue to itemize their deductions, said Caspersen. In fact, the new provisions increase the amount donors can deduct for cash gifts, from 50 percent of the taxpayer’s adjusted gross income to 60 percent. This is good news for some donors because they may be able to see more significant tax benefits in the year of the gift, Caspersen says. These donors also can carry forward their deductions for larger gifts up to five additional tax years.
I am 73 years old and regularly give to several charitable organizations through my IRA. Are there any specific changes for older donors?
Fortunately, the law preserved the Charitable IRA Rollover. This law allows taxpayers age 70 and a half or older to transfer up to $100,000 annually from their IRA accounts directly to charity without first having to recognize the distribution as income. Further, the qualified charitable distribution satisfies the required minimum distribution requirements. “This is perfect for taxpayers who use the standard deduction,” said Cobb, “because this gift is simply an avoidance of taxable income and it is not an itemized deduction.”
Now that the law has passed, do you expect certain gift vehicles or methods of giving to become more popular?
One vehicle that will likely continue to grow in popularity is the donor-advised fund (DAF), said Cobb. DAFs have grown in popularity over the past several years for a variety of reasons, and the new tax law will likely mean this growth continues. A DAF is a philanthropic vehicle similar to a charitable investment account established at a public charity. In a DAF, donors make a charitable contribution, receive an immediate tax deduction, and then recommend grants to other public charities over time. Further, the funds inside the DAF can be invested for tax-free growth. By making a one-time larger contribution, donors are more likely to itemize and see a tax benefit in the year of the contribution even though many of the grants from the DAF may come in subsequent years. Essentially, donors are “bundling” their gifts to contribute to the DAF and then making the grants later.
Assume that in 2018 Grace Franklin has $3,000 in mortgage interest, pays $3,000 in property taxes, and typically donates $2,000 per year to charity and has done so for the past 4 years.
$12,000 (standard deduction for an individual) – $3,000 – $3,000 = $6,000. Thus, $6,000 or more in charitable gifts would justify Grace continuing to itemize her charitable deductions. Unfortunately, she would not see a benefit from her $2,000 gift. Therefore, instead, she should contribute $10,000 to a DAF, which allows her to itemize. Then, Grace makes annual grants of $2,000, similar to her $2,000 annual gifts before. Grace would not need to increase her overall commitment to charity, rather just “bundle” these annual gifts into one year to fund the donor-advised fund and see the tax benefit.
For more details on DAFs, please visit http://giftplanning.uff.ufl.edu/donor-advised-funds.
How do the changes to the estate tax affect a gift through my will or trust?
The new law doubles the base federal estate tax exemption to approximately $11.2 million in 2018 ($22.4 million for a married couple). Even before the increase, only 1 out of 500 estates owed any estate tax in 2017. “The doubling of the exemption affects a very small number of donors and likely won’t significantly affect charitable giving,” said Caspersen.
Caspersen recommends consulting a personal financial advisor for guidance on transferring taxable assets to charity while maximizing the amount of money that goes tax-free to loved ones.
Experts at the Office of Gift and Estate Planning work with individuals and with donors’ financial advisors to explore tax-efficient solutions for those who want to give to the University of Florida. For more information, please call 352-392-5512, toll free 866-317-4143, or email: firstname.lastname@example.org.
About the experts
Paul Caspersen is a board certified financial planner with 21 years of diverse financial services experience in charitable planning, asset management and estate planning.
Alex Cobb is a director of gift planning with a J.D. and an LL.M in taxation from the University of Florida Levin College of Law.