Published on January 2, 2020 in the Rochester Business Journal

President Trump signed the Tax Cuts and Jobs Act of December 2017 (TCJA) into law approximately two years ago, markedly changing the monetary benefits people derive from their charitable giving. The Federal Estate and Gift Tax Exclusions were increased, new laws involving standard and itemized deductions against personal income emerged, and the notion of Qualified Charitable Distributions (QCDs) was introduced. The provisions of the TCJA forced people to be more thoughtful about how, and how much, they choose to give.

Under the TCJA, the estate and gift tax exemption increased from $5.6 million to $11.18 million per person in 2018, $11.40 million per person in 2019, and $11.58 million per person in 2020. Going forward, the excess of an individual’s combined taxable estate and cumulative lifetime gifts exceeding these limits will be taxed at a flat rate of 40%. Faced with such a large tax penalty on the excess over the allowable estate and gift tax exclusion, it seems that the legislation removed a significant financial incentive for individuals to be more generous, since such a large additional amount is now exempt from Federal tax. Previously, giving more money to charity to keep an individual’s taxable estate and lifetime gifts within the then lower exclusion limit was a great way to avoid higher marginal taxes, receive tax benefits for making such gifts, and directly benefit a variety of charities in the process. As discussed below, changes in the nature of itemized deductions and the standard deduction itself have further reduced incentives to give.

In 2017, the standard deduction available to single and married tax filers was $6,350 and $12,700, respectively. Once the TCJA was enacted, these exemptions increased to $12,200 and $24,400, respectively. Essentially, the new law shielded more income from taxation than individuals previously enjoyed, leading to less incentive for individuals to give personally, as a means to reduce their taxable income. The TCJA not only raised the standard deduction available, but also placed restrictions on the nature of certain itemized deductions (namely the $10,000 limitation on the deductibility of state and local taxes (i.e. the SALT deduction)), resulting in more people taking advantage of the standard deduction, as opposed to itemizing. This also suggests that charitable donations from non-retirement accounts, a popular itemized deduction historically, have become far less appealing to many people. Despite the lesser incentives to charitable giving mentioned above, the TCJA did create a few benefits in this regard, the most significant arising from the introduction of the Qualified Charitable Distribution.

A Qualified Charitable Distribution (QCD) allows an individual to give directly to one or more 501(c)(3) charities from most types of IRA accounts. The distributions are completely tax-free, up to $100,000 per year, and effectively allow the individual to avoid paying taxes at ordinary income tax rates, on distributions that would have otherwise been fully taxable. This creates an important incentive to give charitably, since QCDs are completely tax-free, as opposed to gifting from a non-retirement account, where charitable contributions are simply an offset to taxable income, and only if it’s advantageous for an individual to itemize their deductions, as opposed to taking the standard deduction. To boot, QCDs count toward an individual’s Required Minimum Distribution (RMD), if he or she is age 70 and a half or older and subject to forced withdrawals, making QCDs even more significant, in terms of giving to charity and reducing one’s ultimate tax liability.

Aside from the QCD, the TCJA introduced a couple additional incentives that were viewed favorably by not-for-profits, and that might encourage a higher level of charitable giving. First, the amount an individual can give away, per person, per year, and without the need to file a gift tax return, increased to $15,000 for 2018, 2019, and 2020, versus $14,000 for the five years leading up to the TCJA. In addition, donations of non-retirement assets can now offset up to 60% of an individual’s adjusted gross income (AGI), as opposed to up to 50% of AGI previously.

Changes to the tax laws occur with some regularity and it’s important to stay on top of these events with the help of your tax and financial advisor. Throughout the year and especially now, many people say it’s better to give than to receive. Giving thoughtfully and recognizing the incentives associated with doing so will ensure that you’re optimizing the net benefit to all parties involved.

To see his column in the RBJ, click here.