When our friends at the Grand Rapids Community Foundation brought to our attention the new tax law and how it relates to charitable giving—for both the individual and the organizations those individual's contributions benefit—it got us thinking: How do these changes affect us and what do we really need to know moving forward?
Shaun Shira, Major & Planned Gifts Director, Grand Rapids Community Foundation, notes West Michigan has a strong culture of philanthropy, and those who regularly contribute may change how they structure their giving in the wake of the Tax Cuts and Jobs Act of 2017 (TCJA). Shira adds that it's possible the effects of the TCJA will not be apparent for a few years.
"The needs in our community do not diminish when tax laws change," Shira said. "So, if you are able, continue to support the causes you are passionate about."
The good: That charitable deduction is still available and there are several options for individuals wishing to continue their philanthropic support.
West Michigan Woman spoke with the experts at Rehmann to get their professional insight on what these new tax law changes mean and your options for the future.
Did the tax law changes that took effect in 2018 affect your charitable giving? As advisors, we observed our clients planning around the tax law. And while the quantity of donations didn't change—much—timing and methods did.
The standard deduction for a married couple filing a joint return increased from $12,700 to $24,000 under the new tax law. Under the old law—subject to a few extra calculations—if the total of mortgage interest, state income taxes, property taxes, and charitable contributions exceeded $12,700, you could itemize and take the larger sum total. The new law, however, capped the tax portion at $10,000 and increased the total floor to $24,000. Overall, the new law was anticipated to switch many filers from "itemizers" to "standard deductioners" and it put charities on edge; will individuals still contribute if they don't receive a tax benefit?
Generally, charitably-minded individuals give regardless of the lure of a tax benefit. Giving makes people happy, and happy people give more. Tax and financial advisors help extend that warm and glowy feeling through careful tax planning.
- Bunching. Gathering two (or more) years of planned donations into a single year so that in the "bunched" year, deductions in total exceed $24,000. Itemize in one year, take the standard deduction in the next. Keep an open dialog with key charities, so they can plan for cash flow variances over several years. Consider cleaning out the closets and the garage to maximize non-cash and cash contributions. Do a bit of planning when contributing large donations in a single year, as the deduction for cash contributions to public charities is limited to 60 percent of adjusted gross income.
- Donor advised funds (DAF). Donor advised funds function like a charitable investment savings account. Contributions of cash, securities or other assets to a DAF generally qualify for an immediate tax deduction, giving individuals time to determine which charities to support. DAFs can help individuals "bunch" donations into a single year and hold the funds until they are dispersed.
- Donations of appreciated stock. The mechanics are relatively straight forward, yet make an impact. A traditional approach may be to sell stock, create a taxable gain and donate the remaining net cash. By gifting the stock to the charity, the tax burden is removed. The charity sells the stock for full fair value, thus receiving a larger cash benefit.
- Donate directly from an IRA. Donors aged 70½ and older can avoid bringing IRA funds into taxable income by directing funds to a charity straight from the IRA up to $100,000 per taxpayer. And—depending on overall income—they may end up getting an extra benefit by protecting a portion of social security earnings from taxation. Now that's a win-win!
- State tax benefits. Michigan tax formula begins with adjusted gross income (AGI) from the Federal return. Donations that reduce Federal AGI will reduce the amount of Michigan income subject to tax. Donations of appreciated stock and donations from an IRA are both mechanisms that reduce Federal AGI and Michigan taxable income.
Note: Donations of appreciated stock and donations directly from an IRA create benefits for both taxpayers who itemize and taxpayers who use the standard deduction.
New tax laws reduced the corporate tax rate to 21 percent. So, although corporations may not receive the same bang as they did previously, the reasons for being a good corporate citizen extend beyond tax benefits. Corporate identity, enhanced employee engagement, morale, et cetera. ... The list is long.
Corporations can deduct charitable contributions as a business expense. The deduction is limited to 10 percent of taxable income and can be carried over to following years if not fully utilized in the donation year.
Businesses in general—partnerships and corporations—follow slightly different rules when it comes to donations of property such as inventory. The donation is generally limited to the amount the company paid for the inventory, rather than the market value of the inventory.
Charitable contributions have numerous benefits, with the most important being that charitable giving improves your community. Charitable giving with an advisor on your side maximizes the impact.
Written by Laura Steenwyk, CPA, CGMA, MST, Principal at Rehmann, and Jennifer Baldini, CRPC, CFP, Senior Manager at Rehmann. Laura provides strategic tax compliance, reporting and business planning services to clients in multiple industries. She is a trusted advisor to business owners and small businesses, as well as large, closely held clients with complicated tax compliance requirements. Jennifer is a Certified Financial Planner™ professional and financial advisor. She works with high net worth individuals and families to build customized financial strategies that help clients achieve their financial objectives. Disclosure: Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor. Phone: 616.975.4100 Address: 2330 E. Paris Ave. SE, Grand Rapids, MI 49546