Many equine businesses and their supporting equine associations traditionally rely heavily on tax benefits for charitable contributions. The quickly enacted revisions to the existing tax code in late 2017 left donors and their respective charities scrambling to take advantage of last minute itemized deduction credits for fiscal 2017, with resulting head-scratching over how those same donations would be treated in 2018.
The following addresses the most prevalent questions concerning charitable donations under the new tax code.
1. When do the new tax laws kick in?
The new code applies to ALL charitable donations given after January 1, 2018.
2. Does the new tax law increase or decrease charitable donations?
The answer depends on who you ask. A July 2017 study from the Indiana University Lilly Family School of Philanthropy estimated the code’s higher standard deductions in 2018 would equate to a 4.6% decrease in charitable giving in 2018. In a similar report, the Brookings Institute Tax Policy Center estimated this decline might be as high as 6.5%, equating to a reduction of $10 to $20 billion in 2018.
On the other hand, an article by financial law professor James Russell addresses how the 2018 tax law actually increases charitable giving deductions depending on the sophistication of the donor and the manner in which the donations are treated. In summary, if handled correctly, donation benefits for high wealth, high income individuals is higher. The average family taxpayer, on the other hand, may find it difficult to generate donations exceeding the $24,000 standard deduction and therefore eliminate charitable gifts as part of their tax strategy, while still electing to donate solely from a social support basis.
3. How does the new tax code treat charitable giving?
First, the new code does NOT eliminate deductions for charitable giving. Instead, it nearly doubles the amount of the standard deduction, leaving taxpayers with a decision whether to: (a) take the standard deduction, or (b) itemize their deductions, including those for charitable donations. Under the prior law, the standard deduction was $6500 for single taxpayers and $13,000 for married taxpayers filing jointly. The 2018 code raises this to $12,000 single taxpayer and $24,000 married filing jointly. Thus for many average to lower wealth taxpayers, it will be more advantageous to take the standard deduction and forego itemized deductions including charitable contributions.
Proponents of the change argue charitable giving will NOT be negatively impacted where taxpayers, receiving double the deduction previously given, will use some of that extra income to support their charities. They additionally argue that the new law creates various new benefits for higher wealth supporters that INCREASE incentives to donate as follows:
- Incentives to gift appreciated investments, such as stock shares. This allows the donor to deduct the investments’ full market value, subject to certain limitations, without having to pay capital gains tax on any appreciation. For example, if a donor does not wish to change her current investment portfolio, she simply takes the cash she would have donated and uses it to immediately buy stocks, bonds or other assets as a replacement of the ones donated. The portfolio doesn’t change, but the new assets now have a 100% basis which – in normal speak – means no capital gains taxes will be paid on any past appreciation. This creates a donation incentive which goes towards “big bucket” donations rather than smaller donations funded from monthly disposable income. (See Professor James Randall article above, “How the 2018 Tax Law Increases Charitable Giving).
- Contributing directly through Individual Retirement Accounts (IRA’s): For donors age 70.5 years or older, direct asset contributions of up to $100,000 can be counted toward their required yearly IRA distributions and would not be treated as “taxable income”. This would NOT apply to Roth IRA’s and is subject again to regulatory restrictions.
Here’s another example. Your wealthy supporter under the old tax law received a charitable deduction benefit of 50% of income. They own a $1 million home, a $1 million dollar IRA, and a $1 million stock brokerage account invested in growth stocks. All assets increase by 10% in value in that tax year, growing from $3 million to $3.3 million, but how much income do those assets generate? None, unless they are sold. But now your wealthy supporter spends $100,000 which he’s taken from a fully taxable ordinary income distribution from his IRA. His regular donations previously amounted to 1.5% of his wealth, or $50,000, and he’s considering making an additional $10,000 gift. Under the old tax code, he would receive no charitable giving benefit for the additional $10,000 (i.e., tax benefits were maxed out at 50% of income). The new tax law raises the limit to 60%, and permits unused deductions to be carried over year to year up to five years. The higher wealth the donor, the more advantageous treatment this change brings to high dollar contributions.
Here’s another example. You have a married couple who has supported your organization for several years. That couple has $23,500 of itemized expenses, including a $2,000 donation to your qualified charity. If the couple donated an additional $1,000 to your group, they now surpass the $24,000 standard deduction and may claim the itemized charitable deductions. This serves as an incentive to those on the bubble of the standard deduction to give more.
- Create and Donate thru a Donor Advised Fund. Charitable giving can also be handled through a donor advised fund. This method allows you to create, and then contribute cash, appreciated assets or investments that have been held for a year or more to this Donor Advised Fund without paying capital gains taxes. You can then take one large deduction in the year you make the contribution, and then spread out distributions to the charities of your choice over multiple future years or when it makes sense to you.
- Making numerous substantial gifts. For donors whose total contributions in a year exceed $24,000, it makes sense to bypass the standard deduction and instead itemize your deductions. Some tax strategists recommend alternating years – taking the standard deduction in one year while planning to maximize contributions and itemizing in the following.
4. How can my organization effectively plan for charitable giving with the new laws in place?
While change is always uncomfortable, it can also be the basis for positive growth. The law is in place, so organizations must deal with it. This could be an excellent opportunity to examine your current practices on soliciting donor support with your board and your tax accountant or advisor. What old practices still work and will benefit your group, and what new approaches should be considered and implemented?
This also presents an outreach opportunity unique to your high wealth donors. Organize a special event just for them, including a summary of your organization’s history, growth and charitable support, and their important role in the organizations future. Include a presentation from a tax advisor on how these supporters can utilize the new Code to benefit both themselves and their favorite charities.
Most importantly, don’t despair. In many instances, supporters who have traditionally supported an organization with goods or money gifts strongly believe in that organization. That support doesn’t disappear with the code change, and many supporters will continue their support. But at the same time, many organizations have higher wealth supporters who may or may not truly understand the tax benefits of higher giving. The organizations who become proactive in education and outreach will be the organizations most benefitting under the new law.
So study this article, and then pull out your pencil and schedule a meeting with your accountant and membership chairs to plan this important Member Support Outreach event! You may be pleasantly surprised at the results.
© Denise E. Farris. (August, 2018). This article may not be reprinted or reproduced in any manner without the consent of the author. This article is not intended to be the provision of legal advice. For fact-specific questions, refer to an attorney licensed in your state. Contact: Denise Farris, Farris Legal Services, LLC. [email protected].