Charitable Contribution Deductions After New Tax Act

Question:   I have historically itemized my deductions on my personal income tax returns, a meaningful portion of which consist of charitable contributions. What if anything can I do now that my charitable contributions will not provide any tax benefit to me?

Answer:   The new tax law will certainly impact taxpayers who itemize deductions on their personal income tax returns. As a result of the increase in the standard deduction, fewer taxpayers will benefit from itemized deductions such as mortgage interest, state and local taxes, charitable contributions and other items. While little can be done to avoid accelerating home mortgage interest or state and local taxes, some taxpayers who will no longer benefit from charitable contributions may choose to curtail or eliminate their contributions to charity.

With the new law, there will be a greater emphasis on bunching itemized deductions so the aggregate amount of itemized deductions exceeds the allowable standard deduction, $12,000 for single filers and $24,000 for married taxpayers filing joint income tax returns; only aggregate itemized deductions in excess of these thresholds can be deducted. Itemized deductions for mortgage interest and state and local taxes, the latter category of deductions being capped at $10,000 per year, per taxpayer, cannot readily be paid on a non-periodic basis.  Taxpayers can, however, control the amount and timing of their charitable contributions since these are often made at the taxpayer’s discretion rather than at specified times. 

One solution to your problem, cashflow permitting, is to make multiple years of charitable contributions in one year rather than paying a specified amount to charities each year. If, for example, you have traditionally contributed $10,000 per year to charitable organizations, you should consider bunching these amounts and paying $50,000 to charitable organizations in one year and reducing or eliminating your charitable contributions in other years.  This would cause your itemized deductions to exceed the standard deduction threshold in the year the contributions are paid and provide you with some tax benefit for that year. For various reasons, you may not want to skip funding your charities in one or more years, the tax benefits notwithstanding.

Another alternative is to create a private foundation. While various options are available, a common approach is to create a not-for-profit corporation and secure tax-exempt status for the organization from the IRS.  You can then bunch your charitable contributions by making a large foundation contribution in one year and benefit from the tax deduction in that year. Subject to some requirements which are not particularly onerous, the foundation can contribute its funds to the charities of your choosing at whatever times you desire.  You will have received your tax deduction in the year the funds are paid to the foundation while the foundation can make regular annual contributions to the charities of your choosing over a period of years, just as you have done in the past. With a hand-picked board of directors, you can control the foundation’s actions and the recipients of charitable funds.

If the set-up costs of a private foundation are a concern, you might instead consider a charitable funding vehicle known as a “donor-advised fund”.  Simply put, this is a fund you create with a public charity which operates similar to a foundation but provides you with less control over the donated funds. Many established charitable organizations sponsor donor-advised funds whereby you can contribute to the fund and make recommendations to the organization as to when and how the contributed funds are to be paid. The donor-advised fund operates similar to a private foundation. With a donor-advised fund, however, there is no certainty that the contributed funds will be paid to charitable organizations in the manner you wish.

The new tax law presents a challenge to individuals who have historically benefited from itemized deductions. Despite the new law, careful planning may permit you to continue to reap tax benefits from your charitable contributions.

 

The Tax Corner addresses various tax, estate, asset protection and other business matters.  Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.