New tax laws could strip away one of the key motivators of year-end giving in the United States - the right to take a tax deduction for the amount you give to qualified charities if you itemize your taxes.
"Most people give because it’s the right thing to do. But it’s that year-end deadline that motivates them to get over the hump," said Mitchell Kraus, a financial planner based in Santa Monica, California, of the Dec. 31 cutoff for donations to count against that year's taxes.
Neither tax plan wending through Congress does away with the charity deduction altogether, but the bills will probably greatly reduce the number of people who itemize. The two bills raise the standard deduction to $12,000 per individual, or $24,000 per couple.
Wealthy individuals who give tens of thousands of dollars a year may not be impacted, because it will still make sense for them to itemize. But smaller donors who give hundreds or thousands could drop away. As of now, however, Schwab Charitable, which is one of the largest custodians of charitable accounts, has only seen a boom in giving.
Estate Tax Matters
Charitable deductions could also be impacted by changes in the tax proposals to the estate tax. Both plans on the table now change the cap on assets which would be free from the tax, which is currently at $5.49 million per individual or $11 million per couple. The Senate plan doubles it, while the House plan eliminates it altogether. At over $20 million, under the Senate plan, not many people would need to think about giving away parts of an estate to avoid a big tax bill after death.
Kraus is holding conversations with clients who might be impacted. When he first started in the financial advisory business, the estate tax kicked in at $600,000 and necessitated a lot of planning with trusts and giving away assets.
Currently, Kraus still works with clients to shed assets that would push them over the limit later. For instance, one client set up a trust to donate his multi-million boat to his alma mater. He gets to use the boat during his lifetime, but it is set to pass over without tax implications to the University of Southern California when he dies, so his survivors do not have to deal with a complicated transfer of assets or taxes.
Going Around Tax Implications
Despite changes that may come, there will still be some ways to get tax deductions for giving. Those over 70 who are taking required minimum distributions from IRAs, can give directly to charity and reduce their taxable income, Kraus says, if they fill out the correct forms.