Pub. L. 115-97, informally known as the Tax Cuts and Jobs Act (the "Act") was recently signed into law. The Act makes numerous far-reaching changes to the Internal Revenue Code of 1986 (as amended, the “Code”). The changes affecting individuals are generally effective for tax years beginning after December 31, 2017 and before January 1, 2026.
While the Act makes minimal direct changes to the treatment of charitable contributions, some of the major changes to the Code will impact the ability of many individuals to obtain tax benefits from their charitable contributions. Approximately 30% of individual returns that took itemized deductions is expected to sharply shrink. Because charitable contributions are an itemized deduction, those individuals that no longer itemize will lose this tax benefit unless they find another way to obtain a tax benefit.
Changes that directly impact charitable deductions:
- The limitation of deductible cash contributions made to public charities is increased from 50% to 60% of adjusted gross income
- The tax deduction of 80% of the amount of a contribution made for university athletic seating rights is repealed.
- Contributions of $250 or greater are required to be supported by a contemporaneous written acknowledgment (eff. for tax years beginning after December 31, 2016).
Some tax changes that indirectly affect charitable contribution deductions:
- A reduction of marginal tax rates.
- The miscellaneous itemized deductions and limitations on certain other itemized deductions were eliminated.
- An increase of the amount excluded in calculating alternative minimum tax on individuals.
The changes to itemized deductions, the elimination of the deductibility of miscellaneous itemized deductions, and the increase in the standard deduction are expected to sharply reduce the number of returns claiming itemized deductions. In order to obtain a tax benefit for payments made to charities, some taxpayers may be able to take advantage of certain provisions of the Code.
Maximizing favorable federal tax treatment of charitable contributions for certain individuals:
- For those individuals who will continue to itemize, there is no change on deductibility.
- Individuals who have Schedule C income:
Instead of making a personal contribution to a qualified charity, the business could consider a payment that would qualify as a deductible business expense. In order to support the treatment of the payment as a business expense, the business should receive public acknowledgment of the gift. For example, a business could purchase an advertisement in an annual gala brochure or pay for the cost of gala tickets for those persons affiliated with the business.
3. Individuals who have attained 70 ½ years of age:
For individuals who have set up an IRA-Traditional or SEP and are over the age of 70 ½ on the date of making a qualified charitable distribution, a charitable contribution, up to $100,000 during any taxable year will be treated as satisfying the mandatory withdrawal requirement and will not be treated as income to the beneficiary if certain requirements set forth in Internal Revenue Code section 408(d)(8) are met. The payment must be made directly by the trustee to the charity. No deduction is permitted for the contribution.
4. Gifts of appreciated capital property.
While this provision has not changed and the amount of the deduction will still be treated as an itemized deduction, a gift of appreciated capital property offers a taxpayer the benefit of being able to claim the full value of the appreciated property while also being able to avoid the capital gains tax. This device is often used with a gift of stock shares.
It should be noted that most of the items mentioned above are accompanied by complicated restrictions that will require a sophisticated tax professional to navigate.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.