Update: how upcoming tax reform may impact charitable giving decision-making in 2017 and beyond
This is an update to our original post "6 considerations for giving in an age of (potential) tax reform," dated December 8, 2017
On Wednesday, December 20, the U.S. House and the U.S. Senate approved a major tax reform bill, which President Trump is expected to sign into law before the end of the year. The bill contains several elements that will have an impact on the tax benefits of charitable giving in 2018 and beyond.
What are these changes and how might they influence your charitable decision-making? Here are a few thoughts.
1. Consider making a charitable gift before 2017 ends.
Under the new legislation, the standard deduction will increase from $12,700 to $24,000 for married couples, and from $6,350 to $12,000 for single filers. As a result, many more Americans will claim the standard deduction instead of itemizing deductions, thereby losing the chance to deduct their charitable gifts. If you expect to claim itemized deductions in 2017, but not in 2018, it may make sense to accelerate gifts into 2017 that you had planned on making next year. For example, if you have an outstanding pledge to a charity, consider pre-paying that pledge entirely in 2017.
Accelerating gifts into 2017 may be a good idea for another reason: the stock market. There’s no telling what the market will do next year, of course, but it’s close to record highs at the moment, and most charities are able to accept gifts of appreciated, publicly-traded stock. By transferring these stocks to a charity as a gift, you should not only get a tax deduction for the market value of the stock, but you should also avoid taxes on the capital gain imbedded in that stock. To get that tax treatment, you must own the stock for at least one year. Click here for more information about this giving strategy. To make a stock gift to Duke University, click here.
A special note about donations and seating at athletic events
If you had planned on making charitable contributions to support your favorite collegiate athletic program – and obtain the right to purchase tickets to athletic events – then there’s another reason to consider making donations in 2017 that you had planned on making later. Through December 31, 2017, donors who make such contributions can deduct 80 percent of that gift. Starting on January 1, 2018, this deduction will be zero percent. Many universities will accept gifts in 2017 and allocate the seating benefits to future years, to some extent.
2. Explore a donor-advised fund.
If, motivated by this year’s tax reform, you decide to make gifts in 2017 that you had planned on making in 2018 or later, you might explore establishing a donor advised fund. These funds allow you to make charitable contributions (and gain tax benefits) in one year, but wait until later years to choose which nonprofits will benefit from your gift. Donor advised funds are available at most community foundations; you can find a community foundation in your area here. They are also sponsored by many large financial institutions, including Fidelity, Vanguard, Wells Fargo and others.
3. Determine the impact of changing tax brackets and Alternative Minimum Tax (AMT).
When a taxpayer who is subject to AMT claims a charitable deduction, she offsets taxation at the AMT rates of 26 percent or (more likely) 28 percent. While this cuts her tax bill, it doesn’t have the same punch as a tax deduction might have if she were not subject to AMT, where it could offset tax at a rate as high as 39.6 percent this year. In 2018, the threshold at which someone becomes subject to AMT will increase significantly, so many taxpayers who are in AMT now may not be next year. For these folks, a charitable gift made in 2018 may offset income at a higher tax rate and thus have greater financial benefits (if they itemize deductions). The interplay of AMT and the income tax brackets is complex and, like everything in this post, will affect each taxpayer differently. So if AMT is in your past, present or future, consult an expert about how these factors might affect you.
4. Consult your financial advisor.
When it comes to tax planning, it’s important to consider how all of these rules (and others) affect your specific situation. Give your CPA, financial advisor or tax attorney a call to figure out what impact the new tax laws will have on your own giving plan.