by Loraine M. DiSalvo

President Trump signed the 2017 Tax² Act on December 22, 2017, bringing a huge number of changes to the federal tax laws that affect individuals and businesses. This paper is intended to look solely at some of the changes to the income tax rules that apply to individuals, consider how those changes affect charitable giving and charitable gift planning, and suggest some strategies that charitably-inclined individuals can use to maximize the benefits of their charitable contributions under the new rules.

1. Some of the more important effects of the 2017 Tax Act for individual taxpayers. Most of the changes discussed below took effect for 2018 and are currently scheduled to expire after 12/31/2025.
   1. Marginal rates for individual taxpayers are now generally lower:
      1. 2017 rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
      2. 2018 rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
   2. The brackets to which the individual marginal rates apply are now larger, especially for some of the higher rates:
      1. 2017: 28% rate applied to income between $153,100 & $233,350 for taxpayers who file as married filing jointly (“MFJ”) (a spread of $80,250).
      2. 2018: 24% rate (which replaced the 28% rate) applies to income between $165,000 & $315,000 for couples filing MFJ (a spread of $150,000).
      3. 2017: 35% rate applied to income between $416,800 and $470,700 for couples filing MFJ (a spread of $54,000).
      4. 2018: 35% rate (applies to income between $400,000 and $600,000 for couples filing MFJ ($200,000 spread).
         NOTE: Both the Medicare surcharge of 0.9% for wage income over a certain amount and the 3.8% net investment income tax (“NIIT”) remain in effect, and may apply in addition to the normal marginal rate for a given taxpayer.
   3. Personal exemptions were completely eliminated (for 2017, the personal exemption was $4,050 for each of a taxpayer, his or her spouse, and each qualifying dependent).
   4. The standard deduction was doubled (the standard deduction for a couple filing MFJ was $12,000 for 2017; for 2018, the standard deduction for a couple filing MFJ is $24,000); the additional standard deductions available to blind taxpayers and those over the age of 65 were retained.
   5. Many itemized deductions were reduced or eliminated:
      1. Miscellaneous itemized deductions (which included expenses such as tax planning & preparation fees, unreimbursed employee expenses, and investment advisory fees) were completely eliminated.
      2. The deduction for state and local taxes (which included income taxes and property taxes or sales taxes paid to state or local governments) was capped at $10,000. The maximum deductible amount is of $10,000 is the same whether the taxpayer is single or a couple filing MFJ; it is decreased to $5,000 for a taxpayer who files married filing separately.
      3. The deduction for mortgage interest on primary and secondary homes is more limited: you can only deduct interest on up to $750,000 of acquisition indebtedness if the mortgage was acquired or refinanced after 12/15/2017 (but still on up to $1,000,000 for mortgages in place before 12/15/2017). In addition, interest on home equity lines can now be deducted only if the borrowed amount was used to acquire, build, or “substantially improve” either the primary or secondary home. Qualifying mortgage balances and qualifying home equity line balances are added together to determine the total acquisition indebtedness amount.
      4. There is no longer any charitable deduction allowed for amounts paid to a school in exchange for the right to purchase tickets to athletic events held in the school’s stadium (these payments were 80% deductible for 2017)
   6. BUT, some itemized deductions were made potentially more valuable:
      1. The threshold for medical expenses to be deductible was reduced from 10% of AGI to 7.5% for 2018 (and for 2017).
      2. The cap on the deduction generated by charitable contributions made in cash to qualifying public charities was increased to 60% of AGI instead of 50% (the 30% of AGI and 20% of AGI caps that can apply to deductions for other kinds of charitable contributions still exist). The ability to carry forward excess charitable contribution deductions for up to 5 years remains intact.
   7. AND:
      1. The Pease limitation that reduced (or fully eliminated) the amount of itemized deductions that higher-income taxpayers could use has been eliminated (it began limiting deductions at $313,800 for couples who filed MFJ in 2017).³
      2. The exemptions from the individual Alternative Minimum Tax (“AMT”), as well as the income levels at which the exemptions begin to phase out, have been significantly increased.
         1. The 2017 AMT exemption for a couple who filed MFJ was $84,500, and the exemption began to phase out when the couple’s income reached $160,900.
         2. The 2018 AMT exemption for a couple who files MFJ is $109,400, and the exemption begins to phase out when the couple’s income reaches $1,000,000.
   8. The estate, gift, and generation-skipping transfer (“GST”) taxes were retained, but the Basic Exclusion Amount (the exemption from estate and gift taxes) and the GST tax exemption were each increased to $11,180,000 per person through the end of 2025, meaning that these taxes are a concern for even fewer taxpayers.
   9. The corporate income tax rate is now 21% (this change was made permanent and is not scheduled to expire).
   10. Items that are adjusted for inflation, which include the income tax bracket numbers, the gift tax annual exclusion, and many other items in the tax code, will likely increase more slowly than in the past (meaning that the benefits these items generate will also increase more slowly), because they will now be adjusted using the chained Consumer Price Index (“chained CPI”) instead of the standard Consumer Price Index (“CPI”). Both the CPI and the chained CPI track the prices of a theoretical basket of goods commonly purchased by consumers. However, the CPI assumes that consumers will continue to purchase the same goods, even as prices increase, while the chained CPI assumes that consumers will switch to cheaper goods as prices increase. Use of the chained CPI will generally produce a lower estimated rate of inflation.
2. What do these changes mean for charitably inclined taxpayers? The increased standard deduction and the reduction or elimination of some itemized deductions will likely mean that many who routinely used itemized deductions will now frequently use the standard deduction instead. If you don’t itemize your deductions, there is no income tax benefit generated by a deductible charitable contribution. The changes to the corporate income tax mean that individual taxpayers will receive potentially greater economic benefits from charitable giving than corporate taxpayers will. And the estate tax changes mean that lifetime charitable gifts are likely to produce much better overall economic benefits than at-death gifts will.
   1. Taxpayers who want to benefit from itemized deductions need to consider bunching their charitable contributions. In order to increase the chance that charitable contributions, either alone or combined with other remaining potential itemized deduction items, will produce a deduction larger than the standard deduction, taxpayers need to consider bunching their deductions. This means making as many donations (or as large a donation) as possible in a single year, and then making fewer, if any, donations in years for which the taxpayer expects to take only the standard deduction. Ways to bunch charitable contributions include making large outright gifts. They also include making a large gift to a donor advised fund, where the contribution can be made in one year but actual distributions to recipient charities can be made later, over many years, at the taxpayer’s leisure.
   2. Taxpayers who want to maximize the potential benefits of their charitable contributions should consider making contributions in ways that will help reduce their gross incomes in addition to, or instead of, generating a potential deduction. Taxpayers can make charitable contributions in ways that will either postpone or eliminate the taxpayer’s recognition of gross income. Some of the options in this category will produce an income tax deduction and help reduce the donor’s gross income. Another option will simply keep the donor’s gross income lower by causing the donation to be completely excluded, but will not generate a deduction. Donations that help keep the donor’s gross income low can be even more beneficial than donations that just produce a potential deduction. They allow taxpayers who don’t itemize deductions to still realize tax benefits from their charitable contributions. Keeping gross income low can also provide a wide array of other benefits, such as: allowing the taxpayers to be taxed at lower marginal rates; helping keep taxpayers’ incomes below the AMT exemption levels; helping keep taxpayers’ Medicare B premiums lower; making a larger share of medical expenses deductible by reducing the value of 7.5% of a taxpayer’s AGI; helping prevent Social Security income from becoming taxable or keeping the percentage that is taxed below the maximum level; helping avoid or at least reduce the impact of the 3.8% NIIT; and, for a taxpayer who owns a pass-through business entity, helping keep the taxpayer’s income low enough to allow him or her to take advantage of the I.R.C. Section 199A new deduction for qualified business income from the entity.
3. Here are three great options for individual taxpayers to make lifetime charitable contributions that will eliminate or defer the recognition of otherwise-taxable income:⁴
   1. Qualified charitable distributions (“QCDs”). These are qualifying distributions made from a taxpayer’s qualifying tax-deferred retirement account directly to the recipient charity. A QCD will not be included in the donor’s gross income, but it will count towards the donor’s required minimum distribution (“RMD”) for the year of the contribution. This allows a donor whose RMD is less than the cap on QCDs for the year to take the full RMD as a QCD and still not recognize any of the distributed amount as income. A QCD can be used to satisfy an existing binding pledge to the charity. Since QCDs do not generate any charitable deduction, they are ignored in determining whether the taxpayer’s charitable contributions hit the 20%, 30%, or 60% AGI limitations. The rules that apply for a distribution to be a QCD are as follows:
      1. The donor must be at least 70 ½ years old at the time of the distribution.
      2. The QCD must be made from an individual retirement arrangement (“IRA”) (either a traditional or rollover individual retirement account or individual retirement annuity). Note: only traditional, rollover, or inherited IRAs can be used to make QCDs. For inherited IRAs, the beneficiary must be at least 70 ½ at the time of the QCD. 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, and Roth IRAs do not qualify as IRAs for this purpose.
      3. The QCD must be paid by the IRA trustee or custodian directly to a qualifying charity. It cannot have first been paid to the taxpayer (however, if the check is made payable directly to the charity but sent to the taxpayer, the taxpayer can forward the check to the charity and still qualify). The taxpayer cannot receive and deposit the distribution and still make a QCD with the distributed amount.
      4. If the IRA contains amounts resulting from both deductible and non-deductible contributions, the QCD will be deemed to have come first from the deductible portion (i.e., the portion that would have been taxable income to the IRA owner), and not from the non-deductible portion.
      5. The entire contribution must otherwise qualify for the charitable income tax deduction. In other words, a QCD cannot be made in exchange for any benefit provided by the charity to the taxpayer, if the value of that benefit would have to have been excluded from the total amount paid in determining the deductible portion. This means, for example, that a QCD cannot be used to pay for tickets to a fundraising gala or other event held by the charity, even to the extent that the payment exceeds the ticket value.
      6. The charity to which the distribution is made must be either a public charity or a private operating foundation; distributions to a supporting organization or a donor advised fund do not qualify.⁵
      7. No more than a total of $100,000 can be made in QCDs for any given year by any one taxpayer. However, if a married couple files MFJ, then each spouse can be treated as making up to $100,000 in QCDs, for an excludible total of $200,000.
      8. If the taxpayer makes more than $100,000 in distributions in a given year, the excess distributions (the amount that would have been QCDs except for the cap) will be included in the taxpayer’s gross income. The included amounts can then generate a charitable income tax deduction.
      9. The QCD must be supported with a contemporaneous written acknowledgment from the recipient charity; as with other contribution types, the acknowledgment must contain certain information, including the date and value of the contribution and a statement that no goods or services were provided by the charity in exchange for the contribution.
   2. Contributions of qualifying capital gain assets made directly to a qualifying public charity. A taxpayer who holds qualifying capital gain assets (assets that have appreciated since the taxpayer acquired them and that would produce capital gain income for the taxpayer if sold) can contribute them to a qualifying public charity and receive a deduction for the full fair market value of the contributed assets as of the contribution date, while avoiding the capital gain income that the taxpayer would have to have recognized if he or she had sold the assets and contributed cash. The total value of these deductions will normally be limited to no more than 30% of the donor’s AGI.
      1. Qualifying capital gain assets include many business and investment assets that have been held by the taxpayer for more than 1 year or that were inherited by the taxpayer, such as stocks, bonds, other securities, real estate, and certain items of tangible personal property like coin collections, jewelry, and artworks that were not created by the taxpayer.
      2. The best kind of qualifying capital gain assets to use for contributions are marketable securities such as publicly-traded stocks, bonds, or mutual funds; the next best kind of qualifying capital gain asset would be appreciated personal use or investment real estate, such as a home or second home or a lot purchased for its potential appreciation value. although real estate contributions will likely trigger the need for a qualifying written appraisal from a qualifying appraiser. If a contribution is made with other assets, such as tangible personal property or real estate used in a business for which depreciation deductions were taken, additional limitations on the deductible amount may apply.
   3. Contributions of qualifying capital gain assets to a charitable remainder trust (“CRT”). CRTs come in many flavors (examples include charitable remainder annuity trusts, charitable remainder unitrusts, net income charitable remainder unitrusts, and net income with makeup charitable remainder unitrusts); the exact type used depends on a number of different factors. They require the help of an attorney in planning the CRT and in drafting and executing the needed documents. CRTs tend to be suitable only for fairly large gifts ($1,000,000 or more), and lifetime payout CRTs tend to be suitable only for older donors. However, for a donor with a valuable, highly-appreciated asset or group of assets and strong charitable inclinations, a CRT can be a great way to benefit both the donor and the charity. A CRT is a type of trust under which a donor transfers assets to the CRT but retains the right to receive (or have someone else receive) a series of payments from the CRT. One or more charities are designated as remainder beneficiaries, and the donor can retain the right to change the remainder beneficiaries during the payment period, if desired. The period over which the payments will be made can be based either on the lifetime of one or more individuals (such as the donor and the donor’s spouse) or on a set period of 20 or fewer years. At the end of the payment period, the charity named as the remainder beneficiary receives the remaining assets. The contribution to the CRT produces a charitable income tax deduction for that year. The amount of the deduction is based on the estimated value of the charity’s remainder interest as of the contribution date. That value is determined using a number of factors, including the fair market value of the donated assets, the length of the payment period, the estimated total value of the payments, and the prevailing applicable federal interest rate for the date of the contribution. If a donor uses capital gain assets for the contribution to the CRT, the donor will eventually have to recognize the capital gain. However, that recognition will take place over the payment period, not all at once, which can produce a significant tax benefit.⁶ A CRT is a tax-exempt entity, so it pays no income taxes. The CRT can sell the appreciated assets it receives without having to pay any taxes at the time of the sale. As the CRT payments are made to the individual beneficiary or beneficiaries, those beneficiaries report a portion of each payment as income. The type of income reported is based on the type of income generated by the CRT’s assets. For example, if the CRT received and then sold an appreciated asset, and then reinvested the proceeds in assets that generated interest and dividends, a portion of each payment would be treated as capital gain when received by a beneficiary, a portion would be dividends, a portion would be interest, and a portion would be considered a return of the donor’s basis in the contributed asset. This allows the donor to recognize and pay tax on the capital gain over a fairly long period of time, instead of all at once, as would have been the case if the donor sold the asset in the year of the contribution.

¹© 2017, Loraine M. DiSalvo & Morgan & DiSalvo, P.C. All rights reserved.

Notice: The information contained in this article is not intended to be and should not be treated as legal advice, tax advice, or any other advice. Readers should not rely on this material, use it as a substitute for their own research, or use it as a substitute for specific advice obtained from their own professional advisers.

²The tax act passed in late December 2017, which for purposes of this article is simply referred to as the “2017 Tax Act,” was originally promoted as the “Tax Cuts and Jobs Act.” However, the official legal name finally given to the act is as follows: “To provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for fiscal year 2018.”

³There also used to be a personal exemption phaseout for higher-income taxpayers. However, this limitation was effectively eliminated along with the personal exemptions.

⁴Depending on the assets contributed and the value of the contribution, different requirements for supporting a deduction may apply. These requirements are not discussed here, but may include such items as contemporaneous written acknowledgments provided by the charity and qualified written appraisals from qualifying appraisers.

⁵Taxpayers are free to use QCDs to sort of create their own donor advised fund by making QCDs to the same charities to which they might otherwise request distributions from a donor advised fund in a given year.

⁶If the taxpayer has already entered negotiations to sell an asset, or is too close to entering such negotiations, it may be too late for the taxpayer to use that asset to fund a CRT and defer the recognition of gain. Therefore, when a taxpayer thinks he or she may want to use a highly-appreciated capital gain asset to fund a CRT, he or she should consult an estate planning attorney as soon as possible, before taking significant steps towards selling the asset.