So, what do I need to know about the new tax law and how it impacts charitable giving?
By Molly O’Meara Schnell
There has been much discussion—both in the news and right here in our community—about the new tax law, primarily as it relates to income tax changes. However, you may need to also consider the changes in the estate and gift tax areas. We asked Molly O’Meara Schnell, attorney at Schnell & Hancock P.C., to walk us through what you need to know about the new tax laws.
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The federal estate tax exemption has been greatly increased under the new law. As a result, donors like you, who have included charitable gifts in their estate plans, may be better situated if those gifts are made as lifetime gifts. Donors who make planned gifts are likely anticipating a federal estate tax deduction as a result of those gifts. With the increased estate tax exemption amount, that may no longer be true. A review of your philanthropic plans and including lifetime gifts in place of those testamentary bequests could prove much more advantageous for you.
Here’s what you should know: For the near future (through 2025, unless amended sooner), the federal estate tax exemption per person is $11.18 million (adjusted for inflation each year), and for a married couple is $22.36 million. High income donors should be looking for income tax relieve as opposed to estate tax relief.
Lifetime transfers carry a variety of benefits:
you can enjoy the satisfaction of your gift at work today,
the funds transferred to charity are removed from your estate (whether or not there is an estate tax benefit),
the transfer of an income producing asset reduces your income tax exposure in future tax periods, and
you can plan so the lifetime gifts provide the benefit of an income tax deduction.
Much attention is being made to the increase in the standard deduction for individual taxpayers. Many charitable organizations fear a decrease in giving because donors will no longer itemize their deductions, which is how the charitable deduction is utilized. However, you can structure your giving in ways that make it beneficial to itemize and benefit from the charitable deduction.
Let’s consider an example: You may have mortgage interest expense and state and local tax deductions that may cause you to itemize. By “bunching” gifts into a single year, you can utilize the charitable deduction. For example, perhaps you have committed to a gift of $50,000 to be paid over five years. Under the new tax laws, the standard deduction may appear to be the obvious choice for tax reporting purposes for you. Thus, fulfilling the commitment will result in no tax benefit. To maximize the benefit of the commitment, you could bunch the gift over two or three years to push your itemized deductions over the standard deduction in those years.
The idea of “bunching” works well with converting a testamentary or other planned gift to a lifetime gift. Imagine the bequest in your estate plan is for $100,000. This gift could be made as a lifetime gift, in one or more installments, that will provide income tax benefits through itemizing and taking the charitable deduction. So, while you may no longer recognize an estate tax benefit due to the increased exemption amount, you benefit from the income tax deduction.
Each donor’s tax situation will determine the level of charitable giving that must be made in a given year to reach a level of itemization to benefit from the charitable deduction. However, for those donors who have other itemized deductions, the threshold may be much easier to reach. Donors with mortgage interest, state and local taxes, and/or medical expense deductions to itemize may find that fulfilling their charitable intent with lifetime gifts provides an easy mechanism for maximizing the benefit of the value gifted.
Further, if you are a taxpayer that may lose part of your state and local tax deduction due to the new limits on deductibility for federal income taxes, then you may wish to investigate programs in your state of residence that permit state tax credits. There are credits available in Iowa and Illinois, including:
Endow Iowa (25 percent Iowa tax credit),
Iowa Student Tuition Organizations (65 percent Iowa tax credit), and
Illinois Scholarship Granting Organizations (75 percent Illinois tax credit).
Many other states offer similar programs that qualify for state tax credits. Gifts made to these organizations reduce your state income tax through the tax credit and, if you are itemizing, also reduce your federal income tax through the charitable deduction. Historically, utilizing these credits may have cost you a portion of your state income tax deduction on your federal income tax return—a deduction for state taxes has a higher deductibility rate than charitable deductions. However, due to the new limits on deductibility of state and local taxes, this may no longer be the case and a charitable deduction is better than no deduction. Such a gift provides tax benefits at both the state and federal level.
There have always been a variety of reasons lifetime gifts are beneficial as compared to transfers at death. A lifetime gift provides the same benefit as a testamentary gift by removing the asset from your estate and thus, reducing estate tax exposure. Besides the immediate gratification and ability to see your gift at work, the other obvious benefit is the ability to plan lifetime transfers in a way that includes an income tax deduction.
Beyond the benefit of deductibility, there are benefits that are specific to certain asset classes. Gifts of appreciated property permit donors to avoid capital gains tax exposure in addition to a level of deductibility. This type of planning can further a desire to diversify investments as well. This is seen most often with real estate or an inherited or work-related investment.
IRA’s are another asset that benefit from special treatment as they relate to charitable giving. A rollover contribution to charity permits you to avoid the recognition of income as it relates to that distribution while still being treated as having taken your required minimum distribution for the year. This option is available to donors who meet the age and other requirements.
Under the new tax law, there is another asset class with preferential treatment: cash! Gifts of cash are allowed a larger deduction than gifts of other assets (60 percent deductible as opposed to 50 percent deductible).
Now that’s a lot to consider! To recap, donors who have historically provided for charitable beneficiaries in their estate plans should review their holdings, their philanthropic goals and the effects of the tax law changes on their plan. It is likely that you will realize a greater tax benefit, as well as personal gratification, by making lifetime gifts. For those of you concerned about your need for income in the future, there are a variety of gifting strategies that provide a stream of income to the donor for life (and the donor’s spouse, as desired) and still provide the immediate income tax benefit.