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Optimizing Charitable Giving Under the New Tax Law

Taxpayers who routinely make annual donations to charity face a new hurdle: They may no longer be able to deduct their gifts.

Why not? Because the number of taxpayers who itemize their deductions—including charitable donations—is expected to decrease by roughly two-thirds1 as a result of the Tax Cuts and Jobs Act of 2017 (TCJA), which doubled the standard deduction to $12,200 in 2019 for individuals and  $24,400 for married couples filing jointly.

The effects may already be taking hold: The percentage of households that itemized their charitable contributions declined from 21% in 2017 to just 9% in 2018, according to estimates from the nonpartisan Tax Policy Center.2

“Tax benefits are a secondary motivation for many donors—but they’re still a motivation,” says Kim Laughton, president of Schwab Charitable, the nonprofit donor-advised-fund provider sponsored by The Charles Schwab Corporation to facilitate client giving.

The good news is that for many the tax benefits of charitable giving remain—provided you know how to navigate the new tax landscape. Here’s a look at how the TCJA has made giving more advantageous in some ways and less so in others, and how taxpayers can continue to benefit both others and themselves.

The upside

“The TCJA did not cap or eliminate the charitable deduction, which shows that lawmakers were not looking to penalize donors,” Kim says.

In fact, in some ways the tax law actually enhances the value of the charitable deduction by allowing high-income earners to take even larger charitable deductions than in the past. For example:

The downside

Several provisions in the TCJA make charitable giving considerably less advantageous from a tax perspective.

In addition to the doubling of the standard deduction, tax rates have been lowered for five of the seven income brackets—and brackets have also shifted, meaning in many cases more income will be taxed at a lower rate. Both of these developments mean taxpayers will capture less tax savings from their charitable contributions.

What’s more, a $10,000 cap on the deduction of state and local taxes (SALT) has resulted in a higher tax bill for many residents of high-tax states such as California and New York. This not only reduces their disposable income but also makes it that much harder to exceed the standard deduction and therefore itemize their charitable contributions. (Even those who do itemize are unlikely to see as significant a tax savings as they did in the past, because many deductions—including alimony payments and unreimbursed business expenses—were reduced or eliminated as part of the TCJA.)

That said, many taxpayers subject to the standard deduction can still benefit from their charitable donations, so long as they go about it in a slightly more methodical way.

The joys of bundling

“Most people who give don’t do so in order to get something in return—they’re philanthropically inclined,” Kim says. Even so, how can taxpayers benefiting from the new tax law also get back some of the tax advantages of their charitable contributions? One word, Kim says: “Bundling.”

Essentially, this means combining perhaps several years’ worth of donations into a single tax year so that—along with your other deductions—you exceed the standard deduction. (You’d take the standard deduction in the interim years.)

For example, imagine a couple who earmarked $10,000 for charity in 2018. That plus the rest of their deductions added up to $19,000—far more than the standard deduction of $12,700 in 2017 but far less than the post-TCJA standard deduction of $24,000 in 2018.

To offset the loss of their charitable tax deduction, they decided to hold off on their 2018 cash contribution and bundled two years’ worth of charitable donations—$20,000—in 2019. Adding in their $9,000 in other deductions will exceed the standard deduction of $24,400 in 2019, allowing them to itemize and capture a significant tax savings.

Of course, bundling multiple contributions into a single year can feel daunting if you’re not sure how much you want to give and to whom. So to build some flexibility into your giving plan, you may wish to set up a donor-advised fund account, which allows you to donate a lump sum in the current tax year, invest the funds for future growth and parcel out the money to qualified charities over time.

These accounts also make it easier to donate bonds, exchange-traded funds, mutual funds, stock and other investments—and potentially deduct the full fair market value without having to pay tax on any capital gains.

“For a lot of charities, it’s very cumbersome to receive a share of stock here and a share of stock there—and some aren’t equipped to accept such gifts at all,” Kim says. “Donating appreciated assets to a donor-advised fund, on the other hand, is seamless, with fund administrators handling all the processing and reporting requirements.”

What’s more, the money can continue to appreciate once invested in a donor-advised fund account, which means the potential for even greater giving down the road.

Maximum control

Of all the itemized deductions available to taxpayers, the charitable deduction is perhaps the most flexible. Donors can control the amount, timing and type of donations in order to maximize their impact—to both the charity and themselves. “To give may be better than to receive,” Kim says, “but that doesn’t mean you shouldn’t take full advantage of the tax code.”

1Tables Related to the Federal Tax System as in Effect 2017 through 2026,” The Joint Committee on Taxation, 04/23/2018. | 2TPC Microsimulation Model, version 0217-1,” Urban-Brookings Tax Policy Center, 2018.

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Important Disclosures

This article addresses gifts of appreciated non-assets that have been held for more than a year. The tax deduction, for those who itemize, for noncash gifts to a public charity or donor-advised fund account may be used to offset up to 30% of adjusted gross income and can be carried forward for five years. The donor must file IRS Form 8283 when claiming an itemized deduction for contributed securities valued at greater than $500. For gifts other than cash and publicly traded securities in excess of $5,000 ($10,000 for closely held stock), the donor must also obtain a qualified appraisal.

Donors should consult with their tax advisor to determine the appropriate holding period. Under the Tax Cuts and Jobs Act of 2017, carried interest income from investments held for less than three years may be taxed as a short-term capital gain.

Gifts of appreciated property can involve complicated tax analysis and advanced planning. The above article is meant only to be a general overview of some of the considerations and is not intended to provide tax or legal guidance. Please consult with your tax advisor.

Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization. The Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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