The recently enacted Tax Cuts and Jobs Act doubled the standard deduction to $12,000. It changes each year in response to inflation. At the same time, many itemized deductions were limited or eliminated altogether, resulting in far fewer taxpayers itemizing their deductions. One analysis from the Tax Policy Center estimated that the number of itemizers fell from 46 million taxpayers to about 19 million under the new tax law. i As a result, many taxpayers are no longer receiving a tax benefit from making charitable gifts.
Impact on charitable giving
While people don’t necessarily donate to charity because of tax benefits, without them, they may give less. Other factors, like a volatile stock market, may also play a role in reduced giving. Regardless of the cause, there was a change in giving in 2018. After years of strong growth, inflation-adjusted giving declined by 1.7%, according to a new report on philanthropy by Giving USA. ii
Going forward, you don’t necessarily need to adjust how much you donate, but you may want to consider what and how you give.
Three kinds of donations and their benefits
Donating cash remains the simplest form of giving and is eligible for the largest tax deduction of up to 60% of adjusted gross income (AGI). But, because non-itemizers won't benefit from the deduction you should consider other forms of giving.
Whether itemizing or not, donating appreciated property (on which you would pay long-term capital gains tax if sold) can have two positive income tax consequences.
First, if you sold the property, you’d report the gain and likely owe capital gains tax. If you donate the property, you don’t pay the tax, and because the charity is tax exempt, it doesn’t either. Second, you're also eligible for a charitable income tax deduction. The maximum deductible gift of appreciated property is 30% of your AGI; the limit is reduced to 20% if the charity is a private foundation. If you can't use the full deduction in the first year, it can be carried forward for five years.
Qualified charitable distribution (QCD)
If you’re at least 70½, you can direct a distribution from your IRA (no other retirement account can be used) to a charitable organization (other than a donor-advised fund or private foundation). The maximum annual gift (which can be to multiple charities) is $100,000 per taxpayer per year. The gift is not eligible for a charitable income tax deduction, but the distribution is not recognized as income.
One of the benefits of using a QCD is the ability to use your required minimum distributions (RMDs) to make a charitable gift without reporting it as a withdrawal that is subject to income tax. Any part of the QCD can be used to satisfy your RMD requirement, which reduces your reportable taxable income. This may be useful for non-tax planning reasons, such as reduced Social Security taxation, lower 3.8% net investment income tax, and lower Medicare Part B and D premiums.
Let’s say you want to make a charitable contribution of $50,000 to your favorite charity. You have $50,000 of cash, securities valued at $50,000 with a cost basis of $25,000 (at this income level, the capital gains would be taxed at 15%), and you have an IRA with an RMD of $50,000.
Your AGI with your RMD is $300,000. You are married and filing jointly.
You have other deductions such as property taxes and state and local income taxes of $10,000 (the maximum allowed). This means that if you don’t make a charitable gift, you won’t itemize your deductions because the total is less than the standard deduction of $24,400. But with the charitable gift, your total eligible deductions will be $60,000.
Based on these assumptions, the most tax savings comes from doing the QCD. It edges out the donation of appreciated property, even factoring in the added benefit of avoiding the capital gain you’d incur if you sold the asset. But, if the assumptions were tweaked just a bit (i.e., the gain on the assets was greater and/or the capital gains tax rate was higher), the donation of the appreciated property could be more tax favorable.
An additional factor in deciding which assets to give is whether you can or want to “time” your gift.
For example, if you normally give $10,000 per year and have other deductions of $10,000, you wouldn’t itemize because the standard deduction of $24,400 is more. If you double your gift to $20,000 this year and skip next year, you would have $30,000 of deductions, making it worthwhile to itemize and reduce your taxes.
You may also want to “pull” your giving into a year when your effective tax bracket or taxable income is higher than it will be in later years. For example, if you either have higher income than usual or you have some other tax event, you can make multiple years’ charitable gifts in one year to reduce your income.
If you're interested in the tax savings component of these strategies but you don’t want to immediately give the full amount to a specific charity, or you want to build a philanthropy fund for future generations, you may choose to give to a donor-advised fund.
The most tax-efficient source of your charitable giving is impacted by many factors, including your age; the type of assets you have to give; the size of the gift you want to make and the charitable entity you want to give to; whether you itemize; the amount of your gross income (especially if a retirement account withdrawal pushes into the territory of owing the net investment income tax); and even the ultimate recipient of your assets at death. Your tax and planning professionals can help you decide what strategy fits your situation.