Deducting Your Charitable Contributions on Your 2018 Form 1040
Its been almost a year since Congress passed the Tax Cuts and Jobs Act (the “2017 Act”). In the upcoming filing season, as taxpayers prepare their returns for the 2018 tax year, many taxpayers who in past years have been able to enjoy a tax benefit from their charitable contributions will be unable to enjoy a similar benefit from their 2018 contributions, or may find the tax benefit has been substantially reduced. The largest number of taxpayers will be affected by the increase in the standard deduction, which for many will eliminate any tax benefit from charitable contributions. Taxpayers who formerly deducted the contributions to colleges in order to qualify to purchase tickets to college sports will not be able to deduct those charitable contributions for 2018. However, not all charitable contributors will be adversely affected by the 2017 Act. Those who make gifts in excess of 50% of their adjusted gross income or AGI are now able to deduct a larger percentage of the contribution.
These developments, together with strategies that may be appropriate for some taxpayers, are summarized below.
Changes Made by the 2017 Act.
Increased Standard Deduction. The 2017 Act increased the standard deduction to $24,000 for married taxpayers filing jointly ($12,000 for unmarried taxpayers filing separately). According to the Tax Policy Center, in 2014 approximately 30% of taxpayers itemized their deductions. In 2018, the percentage of taxpayers itemizing deductions is expected to fall to 14%. Taxpayers who do not itemize their deductions do not receive any tax benefit from their charitable contributions.
One response to the loss of charitable deductions resulting from the increase in the standard deduction has been for taxpayers to “bunch” their charitable contributions. By “bunching” contributions, a taxpayer who historically has made $5,000 of charitable contributions annually instead makes a larger contribution to a donor advised fund. The contribution to the donor advised fund is deductible in the year in which the contribution is made, but the taxpayer can use the donor advised fund to spread the charitable contributions over a number of successive years.
For example, suppose that Jim and Jan, who are married, regularly contribute $5,000 annually to their favorite charities. Jim and Jan are at the 24% marginal rate in 2018 (taxable income between $165,000 and $315,000). Without considering their charitable contributions, Jim and Jan have itemized deductions of $20,000 (mortgage interest and real estate taxes). Under these facts, with a standard deduction of $24,000, their $5,000 cash contribution would yield only a $1,000 additional deduction and reduce their taxes by $240 (or 4.8% of their contribution). By contrast, if Jim and Jan have the resources, they could instead bunch their contributions for 2018, 2019 and 2020 into a $15,000 cash donation in 2018 to a donor advised fund. By doing so, they would increase their itemized deductions in 2018 by $10,000 and reduce their taxes by $2,400 (or 16% of their contribution). They can use the donor advised fund to support their favorite charities in the following years.
What is a donor advised fund (or “DAF”)? Donor advised funds are public 501(c)(3) charities who permit their donors to make recommendations as to operating charities to be funded. DAFs are operated by many community or religious foundations as well as large financial institutions (such as Fidelity or Schwab). The donor makes a charitable contribution to the DAF. The donor then makes recommendations to the DAF about amounts to be contributed to other charities, and the DAF makes the contributions to the charities recommended by the donor. It is important to understand that the DAF has limitations on the kinds of contributions that can be made. For example, a DAF cannot be used to make contributions for which the donor receives something of value in exchange (such as a night of dinner and dancing at a charitable fundraiser or a purchase at a charity auction). In addition, particular DAFs may have requirements on the charities to which donations are made (for example, a religiously-oriented DAF may have restrictions on making charitable contributions to causes which are antithetical to their beliefs).
Increased Contribution Base. Prior to the 2017 Act, a donor could deduct cash contributions to public charities to the extent of 50% of the donor’s contribution base (generally the donor’s adjusted gross income or “AGI”). Thus, for example, a donor with an AGI of $500,000 was limited to deducting cash charitable contributions of $250,000 in 2017, with any excess over that amount carried over to up to 5 succeeding years. Under the 2017 Act, the percentage was increased to 60% of cash contributions to public charities, so that a donor with AGI of $500,000 can deduct up to $300,000 in cash contributions in 2018.
No Charitable Deduction for Contributions Made to Qualify to Purchase Tickets to College Athletic Events.
Many colleges and universities with popular football or basketball programs offer preferred seating to persons who make donations to the college or university. Although a taxpayer who receives a substantial benefit from a charitable contribution is not ordinarily entitled to a charitable contribution deduction, prior to 2018, a special rule (170(l) of the Code) allowed a deduction for 80% of the donation made to a college or university for the right to purchase preferred seating to athletic events. The 2017 Act permanently amended Section 170(l) of the Code to disallow a deduction for charitable contributions made to the college or university in order to qualify to purchase tickets to athletic events.
For example, suppose that State University requires a $5,000 contribution to its general scholarship fund in order to qualify to purchase season tickets to State University’s football games. Each season ticket in the “club” section costs $500. In 2017, a donor who contributed $5,000 to State University’s general scholarship fund, and purchased 2 season ticket packages for $1,000 could have deducted $4,000 of the $5,000 contribution. In 2018, the same donor, making the same $5,000 contribution and buying the same season tickets is not entitled to deduct any portion of the $5,000 contribution.