Expertise Beyond the Numbers

How Nonprofits Can Work Around Charitable Giving Limitations Under TCJA

The Tax Cuts and Jobs Act (TCJA), which passed into law December 22, 2018, has caused some new and interesting considerations for charitable giving in the upcoming years. What was at first a seemingly friendly law for charitable giving, increasing the charitable contribution limitation from 50% of AGI to 60% of AGI, turned out to be quite troublesome upon further analysis of other TCJA changes.

In previous years, taxpayers had more motivation to give to charitable organizations due to the tax friendly aspect associated with itemizing. A few other adjustments brought on by the TCJA have drastically changed the number of individuals that will be able to itemize. The concern going forward is that taxpayers will feel less motivation to give to charity if they aren’t able to itemize on their tax returns. The examples to follow also consider the following TCJA adjustments:

  • The standard deduction has almost doubled going forward
  • Personal exemptions have been eliminated
  • State & Local Tax deductions have been limited to $10,000

Example #1: In 2017, a couple married filing jointly might have filed as follows:

Items of Notes in Example #1 are as follows:

  • Itemizing is beneficial compared to the $12,700 Standard Deduction
  • The taxpayer is getting a tax benefit from every charitable dollar spent
  • 50% Limitation on charitable giving is not met

Example #2: The same taxpayer’s return in 2018 would look as follows:

Items of Notes in this example are as follows:

  • Itemizing is no longer beneficial compared to the $24,000 Standard Deduction
  • The taxpayer will not get a benefit on charitable giving until their $10,001 donation dollar
  • 60% Limitation on charitable giving is not met

Due to the fact pattern in Example #2, contributors should consider some new ways to structure their charitable giving. Strategically planning to give in bundles or one large donation is a great way to take advantage of the increased standard deduction while not changing the amount that a taxpayer gives to charity.

Example #3: See what happens to the taxpayers in our example if they were to bundle five years of donation payments into one year.

Items of Notes in this example are as follows:

  • Utilizing Bundled Payments makes it more beneficial to itemize compared to the $24,000 Standard Deduction
  • The taxpayer once again is getting a tax benefit from charitable giving
  • 60% Limitation on charitable giving is not met

Bundling charitable giving payments in Example #3 above, allows the contributor to utilize the increased standard deduction in years 2-5 and their overall giving remains consistent at $5,000 each year.

Contributors could also consider a similar concept called a Donor Advised Fund. By making an irrevocable contribution of cash or marketable securities to a Donor Advised Fund the contributor would be eligible to take an immediate tax deduction in the year the contribution is made. Contributors can then make grants from the Donor Advised Funds to the organizations of their choosing. The Donor Advised Funds also have the added benefit of allowing the donors contributions to grow tax fee before making grants.

If you have any questions as you are navigating the TCJA and how it applies to you or your organization, please contact us.

2019 Tax Planning