The fundamental question that each of us must ask: “What is my purpose in making a charitable donation?” If your answer is focused on the tax deductibility of giving, keep reading. If your answer is more altruistic, share this article with your favorite 501(c)3.
Benefits of the new tax law
1) Increase in Amount of Deductibility
For the philanthropical, you now may claim up to 60 percent of your adjusted gross income (AGI) as charitable donations on Schedule A. The old law was at 50 percent of your AGI. For those that give over the 60 percent limit, your donation will continue to carry forward into future years on your Schedule A for up to five years.
In addition to the percentage increase, the Pease limitation for Schedule A has been removed. High income earners (joint filers over $314,000) are all too well acquainted with the reduction of itemized deductions on Schedule A. This reduction affected charitable donations as well, but not anymore. With the new tax law, as long as a person can file Schedule A, 100 percent of the charitable donations are deductible up to 60 percent of the AGI.
2) No More “Contemporaneous” Receipt for Cash Gifts over $250
Unknown to a lot of donors, if you wrote a check in excess of $249.99 to your church, favorite charity or other 501(c)3 donation request, you could only deduct the gift if you received a “contemporaneous” receipt from the organization. From a purely literal interpretation of the law, your church would have to issue every donor during Saturday/Sunday services a weekly receipt of the giving for the donation to be deductible. The tax court ruled in Durden v. Commissioner that the taxpayers could not deduct the donations made to their church, in excess of $25,000, because the written receipt was not “contemporaneous.” There were written records, cancelled checks, and a receipt finally provided by the church with all the necessary language, but the tax court held “no deduction due to lack of contemporaneous receipts.”
With the new law, “contemporaneous” has been removed. Receipts from organizations still must have certain information to be valid, but the receipts do not have to be exchanged at the same time. A receipt must list the following information to be proof for tax deductibility:
- Name of organization.
- The amount of money or description of goods donated.
- Wording similar to, “No goods or services were received or provided in exchange for the gift.” If the organization is a religious organization, the statement should read, “No goods or services, except for intangible religious benefits, which have no monetary value for taxation purposes, were provided or received in exchange for this gift.”
The Bad of the New Tax Law
1) Increase in Standard Deduction
In order for anyone to deduct a charitable donation on the tax return, they would have to be able to itemize their deductions. In 2017, a married couple had to spend in excess of $12,700 to itemize and claim the charitable donations. The IRS estimates that 30 percent of the tax filers itemized for 2017. With the new tax law, the standard deduction was increased to $24,000. The IRS now believes that less than 10 percent of the filers will itemize. This means that if you do not itemize, you do not receive any tax benefit for making your charitable donations. They are still tax deductible, but you have to be over the $24,000 (if married) standard deduction to claim the expenditures.
2) No More 80 Percent Deduction for Football Tickets
For those exposed to college athletics, it is a business: a big money business. Universities and athletic scholarship funds started encouraging donations to the university in exchange for the right to purchase football and basketball (primarily) season tickets. This was in addition to the face value of the ticket that also had to be remitted to the school. Eighty percent of the donation was allowed to be a tax-deductible gift to the 501(c)3 arm of the university. So, if the school needed to raise $4 million for a stadium expansion or buy-out of a coach, it could increase the donation price that donors had to pay to purchase the tickets. Eighty percent of the money that came in this way was a tax deduction. No more.
With the new tax law, the 80 percent donation has been reduced to zero. Remember above where the receipt has to state, “No goods or services were received or provided in exchange for the gift.” The right to purchase specific seats at sporting venues is considered a good and is no longer deductible. This also applies to the schools that implement a point system based upon donations — the more you donate, the more points you acquire — the higher up in the line you are for tickets, parking passes and tournament tickets.
Going Forward
1) Bundling
Based upon the changes, we anticipate seeing donors who are under the standard deduction cap, bundle their donations for maximum benefit. Instead of donating $5,000 over three years, some donors will donate a $15,000 gift, and then not make another donation for the remaining three years. The donor could borrow the money on a 36-month term loan at a 5 percent interest rate and pay $528 in interest, but they would save $4,800 on their taxes if they are in the 32 percent tax bracket. Even if they are in the 10 percent bracket, that is $1,500 in savings after paying interest and still nets a $972 positive cash flow. Instead of making donations during the other two years, the taxpayer uses that same money to pay off the loan.
Even if a large donor bundles and exceeds 60 percent AGI, the excess can carry forward to the following years.
2) Donation of Income-Generating Activities
We have seen an increase of donors giving the actual source of their economic income to charitable organizations. We have seen some donors who want to remain in lower tax brackets and are not donating enough to cross the standard deduction threshold, actually donating the economic source to nonprofits. Yes, people are donating their rental properties, sometimes with reversionary clauses, to nonprofits so the income those properties generate are no longer reflected in the gross wages.
The new tax law has many implications, and a change of strategy might be needed to lessen your tax burden. But, it’s best to speak with a professional before you proceed. Please consult with your tax advisor when strategizing about or applying any tax law changes or implications.
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