Charitable Giving Post TCJA

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Learn how the charitable deduction was affected by the new tax laws

By Brianna Trivelli

After the Tax Cuts and Jobs Act (TCJA) was passed, the charitable deduction was maintained with few changes. However, other provisions of the act affect the utilization of this deduction and changes tax planning for charitable giving.

Standard Deduction vs. Itemized Deduction

One of the most impactful changes of the new tax law are the standard and itemized deductions. Taxpayers often use the charitable deduction to lower their tax liability if they itemize. It is only beneficial to itemize if a taxpayer’s itemized deductions are higher than the standard deduction. There have been a number of limitations imposed on itemized deductions under the TCJA. This includes a $10,000 cap on the state and local tax deductions and real estate taxes. The miscellaneous deductions subject to the 2% AGI limitation (i.e. investment expenses) have been eliminated. Also, the standard deduction will nearly double in 2018. For example, the standard deduction for joint filers will increase from $12,700 in 2017 to $24,000. This will ultimately make it harder for most to take advantage of the itemized deduction and it is expected that many more people will take the standard deduction on their 2018 returns.

Tax Planning

Even with the change in the tax law people can still benefit from the charitable deduction through careful tax planning. These strategies include making a qualified charitable deduction (QCD) from an IRA, participating in charitable clumping, and setting up a donor advised fund.

Taxpayers can still lower their tax bill by making charitable deductions, even if they are taking the standard deduction. This can be achieved by making a QCD. If someone has an IRA, he or she will be required to make required minimum distribution (RMD) when he or she reaches the age of 70.5. The amount being donated is counted toward the RMD and the QCD is limited to $100,000 a year. The QCD will reduce the taxable portion of the IRA distribution, thus lowering adjusted gross income. This tax planning strategy was around before the TCJA, but it could be even more relevant now that fewer people are expected to itemize.

Another way to benefit from charitable giving is to manipulate the timing of the donations so that it is beneficial to itemize certain years while taking the standard deduction in other years. A new strategy that is emerging is charitable clumping. This strategy involves front loading donations by making larger donations in one year rather than making smaller donations every year. Since it will be harder to overcome the hurdle of the standard deduction it could be beneficial to lump donations in this manner. Likewise, donor advised funds are also a useful strategy. The taxpayer can contribute money to a donor advised fund and receive a charitable deduction for the full amount in the year that the fund is set up and then distribute the money to charities over time.

If you have any further questions about the charitable deduction, please contact your Maloney Novotny representative or online here.