Philanthropy: Responding to Tax Reform

NEARLY TWO YEARS AFTER MAJOR TAX REFORM was enacted at the end of 2017, it’s still too early to know whether the law will hurt American philanthropy the way many nonprofits feared. Yet because it significantly altered deduction rules, now is an important time for individual donors to consider tax-efficient approaches to giving.

By roughly doubling the standard deduction to $24,400 for couples and $12,200 for individuals, and limiting many itemized deductions, the law has made charitable giving less attractive from a tax perspective for some households. In fact, itemizers have dropped from about one third of households to about 13%, according to William F. Jarvis, market strategy and delivery executive at Bank of America Private Bank.

Giving held steady in 2018, the law’s first full year. But 2019, when taxpayers have had more time to process the details, may better reveal its long-term impact, according to Ramsay Slugg, wealth strategies advisor in the Bank of America Chief Investment Office. “We’ll have a clearer idea when definitive numbers for 2019 come out in June 2020,” he says.

Meanwhile, for millions of Americans who continue to donate, Slugg and Jarvis offer ideas for giving in light of the new law, and insights on other trends for the future.

Giving with the tax law in mind

“Bunching.” Combining several years’ of donations in a single year could help you exceed the standard deduction, making itemizing the preferable choice for that year. One way to achieve that end is to donate cash, securities or other assets to a donor-advised fund, which enables you to claim an immediate deduction, invest the assets with tax-free growth, and then parcel out gifts according to your own schedule. Distributing the same amount each year from the donor-advised fund, avoiding a more irregular flow of gifts, can also help the charity with its planning.

IRA qualified charitable distribution (QCD). If you’re 70½ or older, donating directly from your IRA offers potential advantages.  A QCD to a qualified charity counts toward your required minimum distributions and, within limits, is not considered taxable income. 

Donating long-term appreciated securities. Instead of cash, consider donating shares of stock or other securities that have grown in value, Jarvis suggests. You can deduct the full market value, potentially making itemizing worthwhile. By contrast, selling the securities yourself could trigger capital gains taxes and the healthcare surtax, reducing the amount available to give.

Donating tangible property such as furniture, jewelry or paintings is a different matter, Slugg notes. If the charity plans to sell those items rather than use them, you are able to deduct only the amount you originally paid. In that case, you might be better off selling the items, paying any capital gains taxes yourself, and donating the proceeds. Because situations vary, it’s important to consult a tax specialist. “You’ve got to run the numbers,” Slugg advises.

Philanthropy and interest rates

Among other issues affecting philanthropy in 2019, ongoing low interest rates also can increase the appeal of some methods of giving and reduce it for others. Charitable remainder trusts, which provide an income stream to the donor over a specified period of time, with the remainder going to a charity, can lose some of their impact amid low rates, Slugg notes. That’s because the amounts are determined upfront using an interest rate set monthly by the IRS based on market rates; the lower the rate, the smaller the charitable donation and the resulting tax deduction.

As an alternative, a donor might consider a charitable lead trust, which works the other way, making payments to a charity for a period of time, with the remainder going to the donor or other beneficiaries. In this case, low rates may increase the donation to the charity, and along with it the tax deduction, Slugg explains.

The changing face of giving

Beyond tax laws and interest rates, trends such as crowd-funding and hands-on philanthropy continued to draw attention in 2019. Crowd-funding involves individuals or organizations raising money for a cause through online services such as GoFundMe or through social media outlets. Donations often support highly specific causes, says Jarvis. “It might even be to help a friend in need buy a car.” These payments may not even be deductible, but they continue to increase, especially among younger donors.      

Hands-on philanthropy is old-fashioned volunteerism recast for the information age, according to Slugg. “Americans have always had a spirit of chipping in and helping people out when they’re down,” he says. A 24/7 news cycle and social media make it easier to organize volunteers. Slugg cites the Cajun Navy, whose members have leaped to the rescue with private boats to help victims of disasters such as Hurricane Harvey, a Category 4 storm that slammed Texas and Louisiana in 2017.  Says Slugg, “I think that’s a big part of the future of philanthropy.”