Keep the charitable gifts coming
The higher standard deduction might make taxpayers less likely to donate to nonprofits. Fortunately, there are ways your clients can still receive tax benefits and continue giving to charity.
July 6, 2022
By Brian E. Deibler, CPA, CGMA
We are on the eve of the first real-world application of the Tax Cuts and Jobs Act of 2017 (TCJA), signed into law by President Trump on Dec. 22, 2017. Most of the changes introduced by the bill went into effect on Jan. 1, 2018, and will make their way on to our clients’ income tax returns for 2018, being prepared by us during our busy season in early 2019. Most of the media attention has been focused on higher standard deductions, the new 199A Qualified Business Income Deduction and changes to tax credits (namely, the increased Child Tax Credit), but I would like to focus on the charitable giving aspect for our clients and how they can maximize tax savings under this new law.
It is true that the higher standard deduction will benefit most taxpayers, especially those who did not itemize their deductions in the past. We should be relaying to our clients that, under this new tax law, personal exemptions are no longer a benefit. The new higher standard deduction does not benefit a married couple with at least three children who did not itemize their deductions in the past.
However, taxpayers who did itemize their deductions in the past may find that the tax benefit from charitable giving is no longer a “benefit” on their income tax returns. There are some items to consider for your clients to ensure that their charitable nature is back in the “positive” category for tax benefits — and for us to ensure that Virginia nonprofit organizations are not starving for the support they need to continue providing much-needed services to our residents.
Qualified Charitable Distribution
The Qualified Charitable Distribution (QCD) has been around in our tax law for some time. Under the TCJA, QCD could turn in to a major benefit for your clients. If you have a client who is 70 ½ and must take their Required Minimum Distribution (RMD) from any applicable IRA, 401(k), SEP account, etc., they should consider the QCD. If you advise your client to send their charitable donations to the organization of their choice directly from their retirement account, the amount of the donation will be excluded from their adjusted gross income. By doing this, you take out the possibility of not receiving the benefit from the donation by way of their itemized deductions exceeding the higher standard deduction amount. In addition, lowering their adjusted gross income as opposed to increasing their itemized deductions could potentially have positive outcomes on other areas of their income tax return and free up tax savings that are otherwise not applicable.
Doubling Every Two Years
For the clients who have a “plan” for their charitable giving or who like to donate a certain percentage of their income to charities, you may advise them to make those contributions every two years as opposed
to giving each calendar year. This may reach the ability to itemize their deductions every other year as the aggregate of the donations every two years will exceed the higher standard deduction amount, while the year “in between,” they will take the standard deduction. Same dollars will be donated and the client is still fulfilling their charitable giving “plan,” while receiving tax benefits every other year.
Donor-Advised Fund
As with QCDs, the idea and benefit behind a donor-advised fund has been around for a while, but the new tax law makes this more sensible. A donor-advised fund is a philanthropic vehicle that is established at a public charity. Your client could make the contribution prior to year-end and the tax benefit is received in the current year. Then after the year has ended, the client can then recommend grants from the fund over time to their favorite charities. The best way to view this is a charitable savings account. The client contributes to the fund as frequently as they like and then recommends grants when they are ready to send to various charities. In addition, the money in the donor-advised fund can be invested and grow tax free, so clients can have extra dollars for their beloved charities.
Appreciated Stocks and Securities
The stock market has done quite well and has experienced record levels over the past several years, leaving many of your clients sitting on potentially large capital gains and tax bills. Advising your clients to donate those appreciated stock and securities directly to charities to fulfill their charitable purpose is a fantastic way to get out of paying capital gains tax on any liquidation of those assets and allows the charity to sell and liquidate without tax consequences at all. The best part about this is the tax deduction to your client is the fair market value of the stock on the date of contribution, not their original basis or gain being “transferred.” Also, you could consider advising clients to contribute these appreciated stocks and securities to a donor-advised fund and take the deduction that way as well, giving them flexibility to liquidate and give to various charities in the future.
Virginia Tax Credits
As the higher standard deduction is getting all the media attention and we start reviewing with our clients their ability to either itemize their deductions or take the standard deduction, another issue limits our clients’ abilities to itemize. The TCJA has a “cap” on the ability to deduct state and local taxes, set to a maximum of $10,000. The total of any state income taxes your clients pay cannot exceed a $10,000 deduction, either from withholdings, quarterly estimated payments or balances due on prior year returns; real estate taxes paid on personal residences, investment property or land; or personal property taxes paid on personal vehicles. This limitation is proving to be very damaging to most of our clients.
How can your clients still fulfill their tax liability to the Commonwealth of Virginia while not having to write checks directly to them and be capped at the $10,000 level? Purchasing tax credits is a great option. There are various programs to fulfill this strategy, but the most popular and probably easiest credits for your clients to purchase are the Neighborhood Assistance Program (NAP) credits. This program allows you to take a minimum contribution of $500, up to $125,000 per taxpayer per tax year, and then receive a maximum tax credit of 65 percent of the value of the donation as a credit on your Virginia income tax return. This tax credit is not granted to all charities in Virginia; each organization must complete an application and apply to Virginia to be approved and granted the credits before they can then sell to taxpayers. You must be cautious with this program, however. In recent years, the number of credits that Virginia has authorized to be issued has diminished. Some organizations, in an effort to keep donation dollars coming in even though they were granted fewer tax credits, have offered a credit amount lower than 65 percent of the amount given. It is up to each charity as to how they administer and grant credits to donors.
Prior to the tax reform, this strategy seemed, at times, to be too good to be true. For example, a taxpayer that donated $10,000 to a NAP-approved organization would receive a tax credit in Virginia of 65 percent, or $6,500. In addition to receiving this tax credit, the taxpayer would also have the ability to deduct the same $10,000 on their state and federal returns to double down on the benefit. A taxpayer in the top tax brackets would potentially receive more in tax benefits than the original $10,000 given.
Spoiler alert: Proposed regulations released by the U.S. Department of the Treasury and the Internal Revenue Service in August 2018 reveal this scenario really seems to be “too good to be true.” Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable contribution deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive in return. For example, the same $10,000 can be given, and the taxpayer will receive the $6,500 Virginia tax credit. However, instead of being able to deduct the full $10,000 on state and federal returns, the taxpayer would only be able to deduct the remaining $3,500 of the $10,000 donated. However, don’t let the proposed regulations stray you from advising your clients on this still very major tax benefit. Receiving 65 percent tax credit and a deduction for the remaining 35 percent of the donation is still very much a greater benefit than only being able to deduct the $10,000 without a state tax credit. And, let’s also remember the goal to fulfill your clients’ charitable giving plan, as well as their Virginia income tax liability, by other means than simply writing a check and being limited to the $10,000 federal deduction.
The proposed regulations do give consideration for a “nominal” amount — set at 15 percent — received in state tax credits to not limit the charity deduction on federal and state income tax returns. So, if you give $10,000 to a qualified charity and you receive just $1,500 in return of tax credits (or lower), the regulations still allow you to deduct the full $10,000 on your income tax returns.
Charitable Bequests
With the new tax law comes new planning opportunities for your clients’ estate plans. By including charitable gifts in their plans, they are expressing their deepest values to family and friends. Some ways to achieve this are: leaving a specific dollar amount or item of property to charity, designating a certain percentage of the estate go to charity or naming the charity as a beneficiary of either the life insurance policy, investment account, bank account or retirement account. Advise your clients to visit with their estate attorney to update any plans currently in place and to include you in the process for planning reasons.
Limitations
Under the new tax law, there have been some changes to the limitations on your client’s ability to deduct charitable contributions. Previously, charitable contributions were limited to 50 percent of your clients’ adjusted gross income, but that has increased to 60 percent. Appreciated assets, including long-term appreciated stocks and securities, are generally deductible at fair market value, up to 30 percent of
adjusted gross income. In addition, the new law removes the “Pease” limitation — the overall reduction on itemized deductions for high-income taxpayers. There was also a reduction of a taxpayer’s itemized deductions by 3 percent of adjusted gross income over a certain threshold, which phases out at 80 percent of the value of itemized deductions.
TCJA brings the largest reform of our tax code in more than 30 years, and it is our duty to ensure that Virginia taxpayers take every opportunity available to receive tax benefits for their charitable contributions — at the same time ensuring that Commonwealth charities continue to thrive and receive support. I view this as the CPA community’s responsibility to the general public. Let’s get to it!
Brian E. Deibler, CPA, CGMA, is vice president and tax partner at Malvin, Riggins & Company, PC, in Newport News. He currently sits on the VSCPA Educational Foundation Board of Directors, was named to the VSCPA’s “Top 5 Under 35” list in 2013 and is a past president of the VSCPA Tidewater Chapter. Contact him at [email protected].