The Good and Bad News on Charitable Deductions under the 2017 Act

The good news first:

a. The 50% of adjusted AGI limitation maximum deduction amounts in any one year is increased to 60% as to cash contributions.

b. The Section 68 3% “Pease limitation” phase-out of itemized deductions is out of the law (through 2015).

These changes can significantly increase available deductions, but mostly for higher income persons and/or persons making significant gifts. Thus, one has to wonder whether the loss of deductions under the “bad news” below for many taxpayers will be offset by these increases.

The bad news:

a. The standard deduction is significantly increased to $12,000 for single people and $24,000 for married taxpayers.

b. Many formerly deductible expenses are no longer deductible,or deductions are limited (e.g., $10,000 limit for state and local taxes).

This means that for taxpayers making smaller gifts, it will be harder for them to have aggregate deductions above the standard deduction threshold. If deductions are not above that threshold, it will make more sense for those taxpayers to not itemize and take the standard deduction. This means that their charitable gifts may not be significant enough to garner a tax deduction. The prediction is that for lower and middle income taxpayers without a lot of deductions, their charitable giving will be reduced without the incentive of an income tax deduction.

There is an obvious planning mechanism for these taxpayers - to aggregate and save up their their charitable gifts and make them in fewer tax years (but to have a higher gifting amount in those years they do gift). The plan would be to take them above the standard deduction limits in their gift years and thus obtain a tax benefit for their gifting. Still, for many taxpayers, even with aggregation (also referred to as “stacking”), their gifts may not be high enough to materially get past the standard deduction thresholds.

Taxpayers who do not want to put large lump sums into the hands of charities but desire a charitable deduction in a current year can avail themselves of existing planning mechanisms that allows a deduction now and money going out to the charity later. These include gifts to private foundations, donor advised funds, and charitable trusts. Note that there are various limitations on deductions and rules on how to operate such vehicles, and some of them are not cost-effective absent large gifts. Before using them, taxpayers should consult with their tax advisors.

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