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New Tax Law Is No “Gift” for Charities

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New Tax Law Is No “Gift” for Charities

The Tax Cuts & Jobs Act (“TC&JA” or “Tax Act”) may not be a gift for charities, because fewer taxpayers will itemize their deductions, in part because of the higher standard deduction of $12,000 for individuals and $24,000 for married couples.  This is an either/or proposition in the Tax Code.  Either you take the standard deduction or you itemize—so each taxpayer has to say which makes more sense for them.  Estimates are that about 21 million fewer people will itemize their deductions under the new Tax Law. See Tax Policy Center Report.  That represents about a 50% drop by number, but not by amount, since charitable contributions still make sense for richer taxpayers.  Another Tax Policy Center Report estimates that the marginal benefit of charitable contributions is reduced by over 5% and as much as 8-9% for the richest taxpayers, further reducing the incentives to be charitable.

Under the new Tax Law, the amount of charitable contributions you can make has increased from a cap of 50% of AGI to a cap of 60% of AGI.  That is one offsetting change that may incentivize some larger earners to make bigger gifts.  But, there aren’t that many taxpayers weighing whether to contribute a full 50% or 60% of their total earnings.

The Tax Policy Center estimates that the Tax Act is “likely to reduce charitable giving by somewhere in the neighborhood of 5 percent. And those gifts will come from fewer—and richer--givers.”

Federal subsidies have also been reduced by about $20 bn!  This further impacts charities, which must walk a tightrope of complex 501(3)(c) rules just to keep their charitable status, and faced with increased regulatory hurdles and an expected drop in giving, charities are looking at a tough year in 2018.

Some of the suggested strategies to maximize tax savings under the new Tax Law are “bunching strategies” where charitable contributions and medical expenses for several years are “bunched” together in a single year to make itemizing make sense.  But, this is essentially a version of the “spend more to save more” strategy that seems to be unwise for most.  The use of donor-advised funds is another option.

What will the future of charitable gifting be under the new Tax Law.  Only time will tell.





Category: Tax

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