Posted January 8th, 2018

Charitable Giving and the New Tax Act

By Robert F. Sharpe, Jr. and Barlow Mann

It may be a better opportunity for planning gifts than you think.

In the time leading up to the passage of the largest tax reform act since 1986, many in the nonprofit world feared that charitable contributions would be adversely affected. The proposed changes could have reduced the number of donors who itemize their charitable gifts to as few as 5%. Reliable industry sources predicted that the new tax law would cause charitable giving to decline by billions of dollars.

These dire predictions were based on various studies of the House/GOP Tax Reform Blueprint released in early summer, which called for broad tax cuts for businesses and individuals and overall tax simplification. In the final analysis, the Tax Cuts and Jobs Act of 2017 did, in fact, provide tax cuts for most businesses and individuals, but failed to deliver much in the way of simplification. The bill encompasses over 500 pages and maintains a high degree of complexity for many middle- and high-income taxpayers.

Overview of changes

While a number of deductions, credits and adjustments were repealed or curtailed, the charitable deduction came through the process basically unscathed and was even enhanced for some donors making larger gifts. The House, Senate and final conference versions maintained the charitable deduction and expanded the overall AGI limitations for the deductibility of charitable gifts of cash by 20%, raising the annual limitation from 50% to 60%.

In addition, the legislation repealed the Pease Amendment, which under current law phases out some of the benefits for itemized deductions, including charitable gifts, for higher income taxpayers. These two changes actually expanded the charitable deduction for a number of America’s most generous donors.

According to Giving USA, over 80 percent of charitable gifts by living individuals are made by people who itemize their deductions for income tax purposes. While the initial blueprint and House proposal would have drastically reduced the number of taxpayers who itemize and potentially affect the amount they give, the final tax legislation featured changes introduced in the Senate version that preserved the benefit of itemizing for a much larger percentage of individuals who itemized deductions in the past.

In other positive developments, no changes were made in the ability to deduct qualified noncash property at fair value donations to gifts of publicly traded securities and tangible personal property given for a related use.

There was also no change in provisions allowing donors age 70½ or older to make gifts directly to charity from their IRAs.

Changes for some donors

While the charitable deduction remains, the effect of doubling the standard deduction and curtailing or eliminating many other deductions means that there will be fewer taxpayers who will be able to itemize their deductions. The conference version of the bill includes a larger deduction for mortgage interest and state and local tax deductions than the original versions of the bill, a move that will restore itemization for many taxpayers.

Still, some former itemizers will choose to take the generous standard deduction and no longer itemize deductions, including charitable gifts. The donors affected in this way will mostly come from the ranks of those who collectively comprise a relatively small percentage of overall individual giving.

Many of those who will no longer itemize deductions due to the expanded standard deduction and other factors will, however, find their overall income tax bill reduced under the new tax law. As a consequence, they will enjoy increased discretionary income that can be spent, saved or donated to charity.

Looking ahead

The tax act delivered broad individual and business tax cuts but fell far short on simplifying the code. While the nuances of the new law are very complex and impact different people in different ways―depending on where they live, their sources of income and other provisions―it is clear that the income tax deduction for charitable giving not only survived, but was expanded in some cases. As a result, it will be more important than ever that donors take special care to ensure maximum tax benefits from their gifts―especially those of larger amounts.

There is another big positive in the final outcome of tax reform. Fortunately, the new law doesn’t change provisions related to charitable gift annuities, remainder trusts, lead trusts or other tax-qualified deferred gifts. These gifts should, in fact, be more attractive than ever for aging Baby Boomers.

As noted previously, there were also no changes to the Charitable IRA provisions that will continue to grow in importance as over three million Baby Boomers reach the qualifying age of 70½ every year during the coming decade.

The virtual elimination of the federal estate tax for 99.9% of Americans will make additional resources available for many individuals who wish to extend the reach of their philanthropy beyond their lifetime. (See The 2016 U.S. Trust High Net Worth Philanthropy report.)

A communications challenge

Unfortunately, many donors, advisors and fundraisers are working under the largely false assumption that both current and deferred giving will be substantially less attractive under the new law.

The challenge now is for charities to take a positive approach. Communications with donors should provide an “antidote” to negative perceptions based on a broad-scale misunderstanding of what the final results of the new law are. Charitable organizations should help donors understand the benefits of these changes and forget the negative press based on the adverse consequences that could have been brought about by early versions of the legislation.

It is essential to inform and educate donors about the survival of tax incentives that have been a vitally important part of our federal income tax code for more than 100 years. It now appears that the majority of upper middle class and higher income taxpayers who have itemized in the past will continue to enjoy tax incentives for their charitable gifts. Those taking the standard deduction will also enjoy greater tax savings than previously, providing them with additional resources to save, give or spend, and another group will fall between the extremes and potentially see their tax bills actually increase. For a more comprehensive examination of the issues, see the link below for our latest White Paper on the subject. ■

This article was excerpted from Sharpe Group’s new White Paper “The Impact of the ‘Tax Cuts and Jobs Act of 2017’ on Charitable Giving” available for download by clicking here.

Click here to order the new booklet “Your Guide to Effective Giving After Tax Reform,” a helpful tool for informing donors of the realities of tax reform and charitable giving.

Barlow MannRobert Sharpe is Chairman of Sharpe Group.

Barlow Mann is Sharpe Group’s Chief Operating Officer.

The publisher of Give & Take is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Give & Take may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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