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Charitable Gifting and the New Tax Law

Unless charitable giving is carefully planned, many individuals will no longer receive a tax benefit for their charitable contributions.

Earlier this year, right around tax time, I was approached by two well-established legal services leaders to discuss resource development for Minnesota’s legal services providers. During this discussion, which ranged from the new tax law to fundraising to charitable gifting strategies, the seed for this article was planted. It is intended to be informative with regard to your own and your clients’ charitable gift and estate planning in light of the new tax law, and is also a call to action.

Why charitable gift planning?

This is important to know for yourself and the charities you support. It’s also useful information for family and friends. Additionally, depending on your practice area, this is vital information for your clients’ tax situations. As reported in the Giving USA 2018 report, charitable giving exceeded $400 billion for the first time ever in 2017.1 

Giving by individuals represents the vast majority of charitable contributions, estimated at 87 percent when bequests from individuals and contributions to private foundations are considered.2 People are motivated to give to charity for a variety of reasons, the most common motives being that they want to make a difference, they want to make the world a better place, giving feels good, or they feel an obligation to give back. Further down the list is paying less in taxes.3 Indeed, many of the conversations I am having these days with people about their charitable giving is about their goals with regard to their philanthropy, how they would like to make a difference, what their favored causes are, and what impact they hope to have in those areas. We often discuss their family, the next generation, values, and ultimately, how philanthropy may be an effective vehicle for passing along their family values to their kids and grandkids. Yet, as advisors, it is also our job to focus on and minimize the tax consequences of giving assets away. Therefore, much of this article is dedicated to tax-wise charitable gifting.

Despite what we would like to think about the critical role advisors play in donors’ decision-making, a 2012 study from Stelter, a national planned-giving company, revealed that planned givers most often make decisions independently (40 percent); other influences include their family (25%) as well as friends, non-profit staff, and materials from the charity (16 percent each). Further down the list were tax advisors and attorneys (tied at 12 percent).4 Do not let this deter you. In a July 2018 study by U.S. Trust, 58 percent of high-net worth clients expressed interest in discussing philanthropy within the first few visits with their advisor.5 Please take this to heart—the vibrancy of our communities depends on philanthropy. If philanthropic advising—or finding the “heart connection,” as one of my mentors, an experienced lawyer, referred to it—is not your expertise, or if you feel comfortable with the technical aspects of charitable gift planning but have not mastered the art of facilitating a values-based conversation relating to how clients want to make a difference in the world with their charitable gifts, you should feel comfortable making a referral to a philanthropic advisor.  In fact, 59 percent of high-net worth clients want their advisor to refer them to another professional for complex philanthropic planning if their needs exceed their advisor’s knowledge.6 Building a network of capable, collaborative professionals, with skills that complement yours, will make you an even more valuable resource to your clients. 

Highlights of tax reform legislation

The long anticipated tax reform bill was signed into law in December 2017. Many of its provisions are scheduled to expire on December 31, 2025. Therefore any planning considerations should be evaluated with that in mind. For individuals, the new tax law provides for the same number of tax brackets, but with lower rates and different income thresholds. Capital gains tax rates remain unchanged. See the charts below for income thresholds associated with each tax bracket.

The tax rates for trusts and estates have also decreased and now consist of only four brackets.7

New rates: 10%, 24%, 35%, and 37%

Old rates: 15%, 25%, 28%, 33%, 39.6%

While changes in deductions, exemptions, and the child tax credit may affect the average taxpayer household, strategic charitable gifting may benefit their tax situation. Some changes to deductions, exemptions, and the child tax credit include:

  • The standard deduction is nearly doubled to $24,000 for married filing joint taxpayers and $12,000 for single taxpayers.
  • Personal and dependent exemptions (previously $4,050 per person) are eliminated.
  • The deduction for state and local income taxes (SALT) is significantly changed. This deduction is capped at $10,000 for the sum of state and local property taxes and income taxes (or sales tax in lieu of income tax). Property taxes paid in carrying on a trade or business will not be subject to this $10,000 cap.
  • The mortgage interest deduction limit on qualified acquisition debt is reduced from $1,000,000 to $750,000. This means interest is deductible on loan balances up to $750,000 used to buy, build, or improve a primary home or one second home. This reduction applies only to debt incurred on or after December 15, 2017.
  • Interest on home equity loans, other than a limited amount that was used to acquire or improve a qualified residence, is no longer deductible.
  • Cash contributions to charitable organizations may now offset up to 60 percent of adjusted gross income (AGI), up from 50 percent.
  • Deductions for investment expenses (excluding certain investment interest expense), tax preparation fees, and unreimbursed employee expenses are eliminated.
  • The phase-out of itemized deductions for higher-income taxpayers is eliminated.
  • The child credit increases from $1,000 to $2,000. The income level at which the credit begins to phase out also increases, allowing more taxpayers to benefit.
  • The alternative minimum tax (AMT) exemption and phase-out levels are increased, potentially allowing many more taxpayers to avoid AMT.
  • The legislation repeals the “Pease Rule,” which reduced the value of itemized deductions for high-income taxpayers.
  • The law repeals the charitable deduction for gifts made in exchange for college athletic event seating rights.
Impact

How these changes affect each taxpayer is dependent on his or her particular situation. For those who don’t itemize currently, a larger standard deduction will be a welcome benefit. Meanwhile the repeal of many itemized deductions means that some taxpayers who previously itemized could find themselves limited to a standard deduction that is smaller than the amount they used to deduct under itemization. Although taxpayers may still itemize, the impact of the limited deductions may offset the anticipated savings from the changes to the tax brackets. Depending on income, the repeal of personal exemptions may be mitigated or offset by the increased standard deduction and/or child tax credit. The $10,000 limit on state and local tax (SALT) deductions will be especially impactful to those in high tax states, like Minnesota. Of note, Minnesota is one of two states in the country that allow non-itemizer taxpayers to deduct charitable gifts. Minnesota state law provides a 50 percent tax deduction for total charitable contributions over $500. 

Four tax-efficient giving strategies

No one can predict the effect that the new tax law will have on charitable giving, though if you are planning to continue supporting your favorite charitable causes, there are opportunities to maximize charitable tax deductions using a few simple strategies.

  1. Bunching your gifts by year or with donor-advised funds.
  2. Gifting appreciated assets.
  3. Qualified charitable distribution (QCD).
  4. Shifting contributions to lifetime rather than through estate. 
Bunching your gifts

The most popular suggestion to lower your tax bill in this new tax climate is by bunching two or more years of your charitable gifts into one year, in order to get your itemized deductions over the standard deduction limit (i.e. $24,000 for married taxpayers filing jointly).8 Taxpayers may bunch their donations into alternate years, with a view to qualifying for an itemized charitable deduction at least some of the time. In this instance, the donor should communicate with the charitable organizations they are supporting to let them know that they are giving more in one year for tax reasons, and that the charity may want to allocate the donation over the time period that the donor intended it to cover. For example, if a taxpayer usually contributes $2,000 to Charity XYZ annually, and in 2018 is planning to contribute $4,000 with the intention that this donation spans their giving for 2018 and 2019, the donor should express this intention to the charity so they can plan accordingly, rather than believing the taxpayer has generously decided to increase their ongoing annual giving. 

By increasing their annual donations to all charities they support with an eye toward surpassing the standard deduction amount, taxpayers may receive a charitable income tax deduction, rather than not receiving a deduction if their giving remained static. Of course, this all depends on charitable giving levels, the amount of mortgage interest deduction, and the $10,000 SALT limitation. You may want to run some preliminary scenarios, or engage your tax advisor to do so, to determine whether bunching is a strategy that would benefit you.

Bunching using donor-advised funds: The fastest-growing philanthropic tool

Along the same lines as bunching your giving into one year by increasing your donations to your favorite charities, there is the strategy of using a donor-advised fund (DAF) as a tool to simplify your tax filings and to replicate your regular charitable giving patterns. According to National Philanthropic Trust (NPT), the nation’s largest independent provider of donor-advised funds and widely known for its data on trends in donor-advised funds in the U.S., a DAF “is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. An easy way to think about a donor-advised fund is like a charitable savings account:
a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.”9 

Donor-advised funds are not new, but we are hearing about them more often because many donors find them useful. In the words of an NPT report, “The first donor-advised funds were created in the 1930s, although Congress didn’t establish the legal structure for them until 1969. In the 1990s, donor-advised funds began to grow in visibility and popularity, and they have become philanthropy’s fastest-growing vehicle in recent years. Today, they account for more than 3 percent of all charitable giving in the United States.”10 In fact, in 2016, Fidelity Charitable, a donor-advised fund, surpassed United Way Worldwide as the largest charitable organization in the country.11 In the same year, three of the top 10 national charities in private donations were “commercial” donor-advised funds.12 Most recent data estimates there is $85 billion in donor-advised funds, which will find its way to public charities as donors recommend grants from their funds.13 

Accountants and taxpayers appreciate the simplified record-keeping that donating to a donor-advised fund allows. The taxpayer need only keep track of their donations to the donor-advised fund, if they are flowing all of their charitable giving through their donor-advised fund via grant recommendations. Other benefits to donors who implement donor-advised funds (compared to private non-operating foundations) include no annual or minimum payout amount, anonymity if the donor does not use a DAF name identifiable with the donor, and acceptance of complex and non-cash assets such as real estate, partial interests in businesses like C-Corporations, S-Corporations, LLCs or LLPs, and other specialty assets, including bitcoin. 

To offer a real life example, after crunching the numbers for my own household, my husband and I decided that opening a donor-advised fund in 2018 is the option best suited to our goals. In my preliminary calculations, the deductions still available to us—the mortgage interest for our home, state and local taxes, and charitable donations—did not get us over the $24,000 standard deduction. I further estimated that if we “bunched” three years’ worth of our charitable donations into one year, it would result in an $8,000 charitable income tax deduction instead of $0 charitable income tax deduction with the standard deduction. Our plan, until the tax law changes again or sunsets at the end of 2025, is that we will front-load our charitable contributions into a DAF every few years to take advantage of the charitable tax deduction in those years, and be satisfied with the standard deduction during the other years. As the one who prepares our tax return, I am anticipating the ease of entering just one, or, if I’m realistic, a handful, of charitable contributions into Schedule A of our 2018 tax return, rather than individually entering them all by hand.

Criticism of donor-advised funds

While I believe donor-advised funds are a useful tool, it is prudent to acknowledge that DAFs have detractors as well. Ray Madoff, the director of the Boston College Law School Forum on Philanthropy, has been a vocal critic. One of the key points of contention is the ability of a taxpayer to receive a charitable tax deduction at the time of the contribution to a donor-advised fund even in the absence of laws requiring minimum distributions from the donor-advised funds, as is required in the case of private foundations. This is a public policy issue rather than a legality or usefulness issue. In the United States, the grants from DAFs have been in excess of 20 percent in aggregate annually for several years.14 So there is some evidence that donors are not abusing this charitable giving tool.

Gifting appreciated assets

While the laws governing charitable contributions of appreciated capital assets did not change, I would be remiss if I did not point out the tax benefits of contributing long-term capital gain property to charity. Using appreciated assets—such as stock, real estate, or shares of closely held businesses—for charitable gifts allows the donor to forgo capital gains taxes and to be eligible for a charitable income tax deduction. This can result in significant tax savings for individuals who like the idea of front-loading the dollars they set aside for charitable pursuits.

Qualified charitable distribution (QCD)

For taxpayers who are charitably inclined and over age 70 and one half, it will be important to evaluate whether it is more beneficial to contribute cash or stock or make a qualified charitable distribution (QCD) from an IRA. A QCD is also referred to as a “charitable IRA rollover” in the nonprofit sector. A qualified charitable distribution, up to $100,000 per taxpayer, is a transfer made directly from the taxpayer’s qualified retirement plan administrator to a public charity. QCDs from IRAs are not includible in the
donor’s gross income for tax purposes and do not qualify for the charitable contribution deduction. It is a “wash” and, in the current tax environment, most closely mimics the charitable tax deduction we had become accustomed to in the prior tax regime. The most suitable asset for gifting will depend on the taxpayer’s unique situation and that decision is best made in consultation with one’s tax advisor.

Shifting contributions to lifetime rather than through estate

Because of the large increase in the Federal estate tax “applicable exclusion” amount, which more than doubled from $5.49 million per person in 2017 to $11.18 million in 2018, there is an opportunity for people with estates under $11.18 million (or $22.36 million for a married couple) to focus on charitable giving during their lifetimes rather than at death.15 This emphasis on lifetime gifting may allow individuals who are including charitable bequest provisions in their will or estate plans for tax reasons to experience the joy of giving now and still receive a charitable income tax deduction. Of note, portability remains unchanged, as does the “step-up” in cost basis at death for capital assets, like real estate and long-term appreciated stock.16

Charity outlook

Since the passage of tax reform legislation in December 2017, many taxpayers and their advisors have focused on how the new law affects small business owners and large corporations. Less attention has been given to how it impacts the charitable giving of individuals and families and the nonprofits they support. But public charities have been laser-focused on this issue and how it may affect their fundraising revenue and their ability to deliver on their missions. 

At a July Minnesota Council of Nonprofits conference, the panel discussion on how donors are responding to the new tax law was one of the most well-attended sessions. It was notable that non-profit leaders expressed cautious optimism about their fundraising potential for the year. In an informal poll, the vast majority of the audience said their fundraising results to date remained on target or above goal, while a handful said their numbers were lagging. It is crucial that that backbone of Minnesota’s safety net, our human services nonprofits, and the standard of excellence we expect from our healthcare, education, and arts institutions are not negatively affected by the new tax law. To sustain the vibrancy of our communities, we must rely on each other to maintain or increase our charitable donations in support of the causes we care about most deeply.

Privileged position

We’re in a privileged position: Those of us trained in the law have a unique vantage point in understanding the complexities of navigating the American legal system. Many of you are hired by your clients to do exactly that. You could also imagine, or you may have experienced firsthand in your work or pro bono activities, how difficult it is to be a client facing a barrier (whether that may be income, language, cultural expectations, inflexible work hours) in wading through these legal waters. Most people do not understand this because they view the legal system through a different lens than lawyers. Most people, even your family, do not have this unique perspective. Facing a legal challenge can be hard. It can be financially and emotionally draining for anyone, let alone for individuals with added challenges. So how do they do it? How do they tackle these really tough situations? They do it with the capable, compassionate assistance of Legal Services.

Donating to Legal Services: Preserving justice

Because we have an unparalleled understanding of the barriers our neighbors may face in navigating the complexities of the law, we need to accept that we have a unique responsibility to support access to legal assistance. If we don’t “get it,” no one will. Lay people usually don’t have the sightline into the lawyering world to understand why legal services are paramount to preserving justice for our community. You do. 

Hopefully, as a lawyer, you believe in justice. Maybe you began your law school journey with the idealist point of view that you were going to make a difference. Maybe your vision for how you would make a difference has evolved since those law school days. Many lawyers find themselves in fulfilling legal careers that don’t necessarily tap into that ideal of advancing justice on a daily basis. By financially donating to legal services, you will guarantee that justice is accessible to those who need it the most in your own community. This is our responsibility as members of the legal profession. Your charitable donations can make the world a better place. We are the most informed and uniquely qualified to make these donations.

Prior to joining Well Fargo Private Bank as a philanthropic specialist, where she consults with individuals, families, non-profits, and private foundations on philanthropy, MARIE RUZEK was a fundraiser and volunteer coordinator for 20 years. Most recently, she led the planned giving and endowment programs at Greater Twin Cities United Way and Mitchell Hamline School of Law. She earned her JD from William Mitchell College of Law.

Wells Fargo Wealth Management and The Private Bank provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is the banking affiliate of Wells Fargo & Company. Wells Fargo and Company and its affiliates do not provide legal advice. Please consult your legal and tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depend on the specific facts of your own situation at the time your taxes are prepared.

Notes

1 Giving USA Foundation. Giving USA 2018: The Annual Report on Philanthropy for the Year 2017. (Accessed August 16, 2018).

2 Ibid.

3 2012 Stelter Donor Insight Report: What Makes Them Give? Page 15. https://www.stelter.com/white_papers. (Accessed 8/13/2018).

4 Id., page 10.

5 The U.S. Trust Study Of The Philanthropic Conversation: Understanding advisor approaches and client expectations. Page 24. https://ustrustaem.fs.ml.com/content/dam/ust/articles/pdf/the-philanthropic-conversation.pdf. 

6 Id., page 49.

7 Tax Cuts and Jobs Act, Pub. L No. 115-97 (2017).

8 Id. 

9 National Philanthropic Trust. What is a Donor-Advised Fund (DAF)? https://www.nptrust.org/what-is-a-donor-advised-fund. (Accessed August 16, 2018).

10 Ibid.

11 Chronicle of Philanthropy. The Philanthropy 400, 2016. https://www.philanthropy.com/specialreport/the-philanthropy-400-and-the-n/158?CID=cpw_directory_data. (Accessed 8/16/2018).

12 Ibid.

13 National Philanthropic Trust. 2017 Donor-Advised Fund Report, Growth in Recent Years. https://www.nptrust.org/daf-report/recent-growth.html. (Accessed 8/16/2018).

14 National Philanthropic Trust. 2017 Donor Advised Fund report. https://www.nptrust.org/daf-report/.

15 Tax Cuts and Jobs Act, Pub. L No. 115-97 (2017).

16 Id.

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