Charitable giving has become harder under the Tax Cuts and Jobs Act, but your wealthy clients can still find tax advantages in donating.
Giving by individuals fell 1.1% in 2018, a decrease of 3.4% when adjusted for inflation, according to “Giving USA 2019: The Annual Report on Philanthropy for the Year 2018,” a publication of the Giving USA Foundation and researched by the Indiana University Lilly Family School of Philanthropy.
“Tax policy changes may have created uncertainty for some donors, especially those who previously itemized but no longer will,” said Una Osili, associate dean at the Lilly School.
More than 45 million households itemized deductions in 2016, according to the foundation, which added that the total may have dropped to some 18 million households in 2018, reducing an incentive for charitable giving.
Daniel Morris, a senior partner at Morris + D’Angelo CPAs in San Jose, Calif., advises wealthy clients to craft a strategy to their giving. “I ask them to seek innovative options for their charitable giving,” he said. “Separate pure charity, such as the Red Cross or Salvation Army during a hurricane, from strategic charity or philanthropy such as universities or the local community institution.”
“High-net-worth individuals often have a very close attachment to causes and they continue to give to those organizations,” added Craig Richards, managing director and director of tax services for Fiduciary Trust Company International in New York. “With the elimination or reduction of many deductions ... charitable giving is one of the few remaining tax-planning tools they have.”
But tax reform has forced wealthy taxpayers to make adjustments to their plans if they want to reap the tax advantages of charitable giving, advisors said.
“Before the TCJA, charitable contributions were more of an every-year item,” said Mary Kay Foss, a CPA in Walnut Creek, Calif. “The age-old strategy of bunching deductions has become much more popular with the TCJA increase in the standard deduction.”
In an example of bunching deductions, a charitably inclined client gives less than the new standard deduction of $24,400 in 2019 and consequently sees no tax benefit. Instead, that client could double their annual giving in one year to get more than the standard deduction; the next year, that client would do no charitable giving and simply take the standard deduction.
What are the best assets to donate? “Appreciated stocks—their holding periods need to be closely monitored—and stocks that may be creating unexpected or unavoidable liquidity events offer opportunities and risks,” said David Levi, a CPA and senior managing director at CBIZ MHM’s Minneapolis office. “We also have to monitor the portfolios to be aware of stocks that may qualify for section 1202 tax benefits. These should not be donated.”
High-net-worth clients should look to give appreciated property instead of cash, Richards said. “If they need to sell the appreciated property to raise cash to make the charitable contribution, they’re being tax inefficient because of the capital gains they’ll pay on the sales,” he said.