Historically, Americans have been extremely charitable and, given the sweeping income-tax changes voted on by Congress this week, the normal year-end decision-making regarding donations to nonprofit charitable organizations has suddenly become far more critical.
In prior years the decision of how much and to whom to give donations centered around three primary issues:
- Dollars available to donate.
- Tax results of such gifts.
- Needs and legitimacy of various organizations needing support.
This year, however, there may be a need to carefully review any tax-law changes taking effect in 2018. For instance, one of the promoted income-tax law changes is the doubling of the standard deduction for non-corporate taxpayers in future years and, at the same time, elimination or limiting of some of the itemized deductions allowed in previous years: most notably, the state and local sales tax, income tax and property tax deduction; miscellaneous itemized deductions; and the home-mortgage interest deduction. (Interestingly, if one is able to itemize deductions, charitable deductions may be deducted up to 60 percent of adjusted gross income in 2018, up from 50 percent for 2017 and prior years. This may be helpful only if one can still itemize deductions.)
Either because of the increased standard deduction and/or the elimination of some of the itemized deductions, many taxpayers may find they can no longer use itemized deductions. If that’s the case for 2018 or a future year, it may very well be that individual donors need to consider making additional charitable donations before Dec. 31, 2017, to get the tax benefit this year that would be lost in 2018. In addition, taking a donation deduction in the current tax year when tax rates are potentially higher than in future tax years may yield additional income-tax savings. (The thinking could be the same for corporate entities who may face decisive tax-rate reductions in future years.)
As an aside, a new tax law provision that has not been well marketed is that taxpayer personal exemptions — currently $4,050 per taxpayer and dependents — will be eliminated in future years. Hence, a married taxpayer with two children who cannot claim the child tax credit will lose four personal exemptions totaling $16,200 but also see his standard deduction increase from $12,000 to $24,000 — an increase of $12,000 — leaving a net increase in taxable income. If a couple’s taxable income is not over $77,400, their tax rate will decrease 3 percent but still leave the family with an income-tax increase — not the decrease being almost universally promoted.
Also, for those taxpayers and donors who are over 70½ and eligible to make a direct IRA rollover (called a QCD or qualifying charitable distribution) to a charitable entity, now may be the time to consider that for 2017 and later years. QCDs allow a taxpayer to avoid reporting a retirement distribution in his or her reportable income and avoid deducting the charitable deduction as well.
If the taxpayer can no longer itemize his deductions, then the charitable donation deduction may no longer be tax beneficial, so avoiding the income reporting through the QCD makes perfect sense. Current law allows each individual over 70½ to make total annual QCDs of any amount up to $100,000. And several entities can receive the donation so long as the grand total is not more than $100,000 per taxpayer per year and the donations are paid directly from the IRA to the charity.
An interesting tax advantage may also be available to heirs of taxpayers if IRAs, rather than other assets, are used to fund charitable giving. If, for instance, a taxpayer has a savings account of $100,000 and also an IRA of $100,000 and the taxpayer dies having previously gifted the $100,000 of savings to charity, leaving the $100,000 in the IRA to his or her heirs, the heirs will potentially pay income tax on the $100,000 IRA as it is distributed. Alternatively, if the taxpayer gifts the IRA to charity via the QCD, leaving the $100,000 in the savings account to his or her heirs, the taxpayer avoids any income tax on the QCD and the heirs take the $100,000 in the savings account without further individual income tax.
Because a qualifying charitable distribution from an IRA does not have to be reported in income, a taxpayer’s adjusted gross income is obviously lower. This could mean that future Medicare premiums — the amount of which is determined by a prior year’s “modified adjusted gross income” — might be considerably lower. Also, since some itemized deductions are allowed to the extent they exceed a percentage of the adjusted gross income, if the adjusted gross income and the modified adjusted gross income are lower, more of the itemized deduction may be allowed if deductions can be itemized.
Also, fewer Social Security receipts may be taxable as adjusted gross income declines and state income tax returns, if required of the taxpayer, can be beneficially affected with lower federal income reporting. Finally, the alternative minimum income tax could also be advantageously affected with lower reportable income.
Taxpayers should consult their tax advisers before making charitable gifts to ensure tax savings are maximized and the QCD can be accepted by the chosen charity. Now is a critical moment to consider the timeliness of effective and tax-beneficial charitable donations so that the philanthropy for which Americans have always been known continues. In so many ways, the need is greater now than ever.