People who regularly make charitable contributions generally expect that those contributions will be deductible on their income tax returns. However, some of the currently proposed tax law changes would effectively eliminate this deduction for a huge portion of U.S. taxpayers. This means that, if you plan to make charitable contributions, you should consider making them before the end of 2017, to help ensure that you will be able to deduct those contributions.
Both the U.S. House and Senate have recently proposed sweeping changes to U.S. tax laws. As of December 13, 2017, they have agreed on a compromise bill that they hope to have passed and sent to President Trump for him to sign before Christmas 2017. While details of the compromise bill are not completely clear, both the House Bill (called the “Unified Framework For Fixing Our Broken Tax Code”) and the Senate Bill (called the “Tax Cuts and Jobs Act”) included a change to the standard deduction used by individuals and married couples for federal income tax purposes. If this change, as proposed, is included in the final bill, then the standard deduction will increase significantly in value.
The increased standard deduction is expected to greatly reduce the number of taxpayers who benefit from using itemized deductions instead of the standard deduction, because itemizing makes sense only for those whose itemized deductions exceed the value of the standard deduction. One estimate says that as little as 3% of the taxpaying population will still be able to use itemized deductions if the proposed change to the standard deduction is put into effect. Because the charitable deduction is an itemized deduction, it is effectively available only for those taxpayers who itemize instead of using the standard deduction. Thus, even though the charitable contribution deduction will still remain technically available for 2018 and future years under the proposed new tax laws, up to 97% of taxpayers will no longer be able to directly benefit from it on their tax returns. If you want to ensure that you can get a tax deduction for amounts that you contribute to charity, this means that you now have a strong incentive to make those gifts in 2017, instead of in later years.
Outright gifts to charity are certainly an option. However, for those who may want to take advantage of the charitable contribution now but postpone the final decision as to what charities receive the contributed assets, there are options that will let you make a charitable contribution now, and then decide how the gifted funds will ultimately be distributed to other charities in the future.
The simplest such option is a donor advised fund (“DAF”). Donor advised funds are accounts that are held by a charitable organization. Assets are contributed to the DAF by the donor, to be held in the DAF account and managed by the sponsoring organization. The donor can then periodically request that funds be distributed from the DAF to other charities, allowing the donor (and his or her family) to take the time to consider what gifts to make and how to make them. Charities that sponsor DAFs include, among others, The Community Foundation for Greater Atlanta, The Jewish Federation for Greater Atlanta, the National Christian Foundation, the Cobb Community Foundation, The Community Foundation for Northeast Georgia, Fidelity Charitable, and Schwab Charitable.
There are other, more complex options that also allow a charitable contribution to be made now, with the decisions about what charities ultimately receive the gifted assets to be made later. These include private foundations, supporting organizations, charitable remainder trusts, and charitable lead trusts. However, all of these require more time and effort to create than a DAF, and so these options are not as useful for spontaneous year-end gifts.
In order to ensure that you can make desired charitable gifts before the end of 2017, we suggest either making direct charitable contributions or contributions to a DAF, unless you already have an existing supporting organization or private foundation. We also suggest that you consider contributing easily-valued assets such as cash and publicly-traded securities, instead of more complicated assets like real estate or closely-held business interests. Please note: one of the best assets to use for contributions is appreciated stock that you have owned for at least one year. Such stock will generally produce a charitable deduction based on the stock’s fair market value on the contribution date, and no gain will need to be recognized by either the taxpayer or the recipient charity.
No matter what kind of gifts you decide to make or what assets you decide to transfer, you must move quickly because setting up accounts and transferring assets takes time, and contributions must be completed before the end of 2017 in order to be counted on 2017 income tax returns. However, the good news is that many DAF-sponsoring organizations are likely ready and willing to move quickly to help you complete your charitable contributions before the end of the year.
Giving to charity tends to make the givers feel good, because they are supporting causes and programs that they care about and that are intended to benefit others. While charitable giving will likely still produce these good feelings in the future even if the charitable deduction ceases to benefit most taxpayers, taxpayers who were planning to make charitable contributions in the near to mid-term future should strongly consider making those contributions before the end of the year, while they can still produce some income tax savings in addition to the good feelings.
For any charitable giving you do, thank you!
Happy holidays, and we hope you have a happy and healthy new year!