Insight on Estate Planning
CHARITABLE GIVING IN A POST-TCJA WORLD
What you need to know in the wake of the new tax law
The Tax Cuts and Jobs Act (TCJA) represents the biggest overhaul of the tax code in more than three decades. Tax experts are still sorting out all the intricacies. But this much is clear: the TCJA will have a significant impact on estate planning and related aspects, such as charitable giving.
Even though the TCJA reduces tax incentives for making charitable donations for some people, it encourages contributions for others. Let’s take a closer look at the new tax landscape and how it relates to charitable giving.
Key provisions
Several tax law changes affecting charitable donations are intertwined with other provisions. The TCJA effectively doubles the standard deduction to $12,000 for single filers ($24,000 for joint filers) and scales back or eliminates some itemized deductions. For instance, the deduction for state taxes is limited to $10,000 annually, while the deduction for miscellaneous expenses is repealed. At the same time, individual tax rates are reduced. These changes are now in effect and scheduled to “sunset” after 2025.
Notably, the tax deduction for charitable donations is preserved. In fact, for 2018 through 2025, the annual deduction limit for cash contributions has increased from 50% of adjusted gross income (AGI) to 60% of AGI. Nevertheless, the conflux of other provisions, especially the doubling of the standard deduction, may discourage charitable intentions. Some individuals who no longer itemize deductions might forego charitable contributions they would otherwise make (you must itemize to claim them).
Another significant change is the increased amount of the gift and estate tax exemption from $5 million to $10 million (inflation-indexed to $11.18 million in 2018). As a result of this increase, fewer individuals will have federal estate tax concerns and thus may be more inclined to make charitable donations, subject to the restrictions stated above. Caveat: State estate taxes may apply at lower limits than the federal exemption.
Charitable techniques to consider
In this new environment, you may use one or more charitable gift techniques as part of a comprehensive estate plan. There are several potential options to consider, including:
Bunching deductions. In the wake of the TCJA, you may claim the standard deduction in some years, so charitable donations won’t provide any tax benefit. Conversely, in other years when you itemize, those deductions are valuable. Accordingly, you might bunch charitable gifts in years you expect to itemize and skip large contributions in other years.
Charitable remainder trust (CRT). This trust type remains a viable option under the TCJA. Essentially, you create a trust, funded with property such as real estate or securities, to pay out income to a designated beneficiary for life or for a term of years. The CRT generates a current tax deduction based on government tables. At the end of the trust term, the remainder goes to the charity of your choice.
Donor-advised funds (DAF). With a DAF, you can exert more control over your charitable endeavors. First, you contribute to a fund, typically managed by a reputable financial institution or another sponsoring organization. Next, you instruct the fund as to how to dole out the money to your favorite charities. Subsequent DAF contributions may be made in years you itemize.
Gifts of property. Instead of giving cash to charities, individuals will frequently contribute appreciated property, such as securities. If the property would’ve produced long-term capi