As we enter the busiest time of the giving season, many of us will be revisiting the 2017 Tax Cuts and Jobs Act (TCJA) and evaluating how it impacts individual philanthropy, as well as the total landscape of charitable giving.
There’s no doubt that fewer individuals will have a tax benefit from making charitable contributions. And, while charitable giving has seldom been motivated only by tax deductions, those deductions do play a role in planning.
Under the TCJA, the new standard deduction nearly doubled:
- The new standard deduction for married joint-filing couples is now $24,000, compared to $12,700 for 2017.
- The new standard deduction for heads of households is now $18,000, versus $9,350 for 2017.
- The new standard deduction for singles and those who use married filing separate status is now $12,000, versus $6,350 for 2017.
For the most generous donors, the TCJA provides some new incentives to increase charitable giving:
- Adjusted gross income limitation for charitable gifts of cash that can be deducted in any particular year has been increased from 50 percent to 60 percent.
- The expansion of the exemption of the alternative minimum tax means that fewer high-net worth taxpayers will be subject to alternative minimum tax, which should benefit charitable giving generally.
These donors may find that they have even more capacity to give in light of these changes. Additionally, the charitable income tax deduction remains unchanged, so for donors who will continue to itemize regardless of the increased standard deduction, charitable giving should stay constant or possibly even increase.
However, for the majority of donors, the impact of the TCJA on charitable giving will likely be substantial. The National Council of Nonprofits estimates that the doubling of the standard deduction to $24,000 will lower charitable giving by $13 billion per year. This could be devastating for many organizations, particularly at a time when public funding is being cut.
So what can we do?
Creative strategies and emphasizing non-tax benefits may help offset some of these losses. One of these strategies is “bunching” charitable donations. By bunching donations, donors combine multiple years of “normal” annual charitable contributions into a single year. Here’s how bunching works:
- Rather than donating and itemizing every year, a donor contributes to their donor advised fund every third year, with an amount equal to the total needed for three years.
- In the first year, the donor itemizes their deductions when filing their tax return.
- In the next two years, the donor makes their contributions from the donor advised fund and claims the standard deduction on the tax returns for those years.
The National Council of Nonprofits estimates that the doubling of the standard deduction will lower charitable giving by $13 billion per year. This could be devastating for many organizations, particularly at a time when public funding is being cut. But creative strategies may help offset some of these losses.
Consider an example of the benefits of bunching with a donor advised fund at the Trust. A donor would place $30,000 into their donor advised fund in year one. They would then also be able to claim the maximum $10,000 for their real estate and state income taxes. Thus, in year one, the donor would itemize the $40,000 in deductions.
In the following two years, the donor would take the standard deduction of $24,000 for each year. Total deductions for this three-year period would be $84,000.
Without bunching, if this donor made $10,000 in charitable donations each year for three years, they would not itemize and would take the standard deduction of $24,000 each year, thereby totaling $72,000 in deductions over the same three-year period without bunching.