The Tax Cuts and Jobs Act of 2017 (the Act) made numerous changes to long-standing tax policy including, among others, personal exemptions, tax rates, standard deduction amounts and itemized deductions. These changes have the potential to change the way donors look at the economic benefit of making charitable contributions. While many donors are making gifts as a result of their belief in the mission of a not-for-profit organization, there is no denying that the economics associated with charitable giving and the impact on personal income taxes is a significant consideration for many donors. As a result, not-for-profit organizations who benefit from charitable gifts must be sure to understand the implications of the changes and give consideration to development of a strategy that attempts to counteract any negative consequences of the Act.
A big change under the terms of the Act was to increase the “Standard Deduction” to $24,000 for married couples filing jointly and $12,000 for single taxpayers up from pre-Act amounts of $12,700 and $6,350, respectively. In addition, the personal exemptions that taxpayers were able to claim in prior years were eliminated. At the same time, a limit to deductibility of state and local taxes paid by a taxpayer was put in place with an annual limit of $10,000. This combination of actions makes it possible that taxpayers who previously itemized tax deductions (including charitable contributions) would be better served in a post-Act world to claim the standard deduction thereby decreasing the economic value of a charitable gift from a tax perspective.
One strategy that attempts to address this situation is to aggregate charitable giving for multiple years into a single calendar year. An example of how this could work would be to take the amount you would normally give to charity in year 1 and segregate in your bank accounts. Then in year 2 you combine this segregated amount with the amount you would normally give to charity in year 2 and when coupled with other itemized deductions you exceed the standard deduction amount. This charitable gift “bunching” would then provide economic benefit to your charitable gifts once again. This is something that not-for-profit organizations should consider communicating to donors that historically have made gifts that fall below the amount needed to itemize their deductions.
Mario Urso is a partner based out of our Buffalo and Rochester, NY office.