The increase of the standard deduction under the Tax Cuts and Jobs Act of 2017 (the “TCJA”) is predicted to have a substantial impact on charitable giving. The TCJA doubles the standard deduction for individuals from $6,350 to $12,000, for couples from $12,700 to $24,000, and for heads of household from $9,350 to $18,000. The increase will discourage most taxpayers from itemizing. When itemizing, taxpayers receive charitable tax deductions for donations made to nonprofits but when taxpayers choose the standard deduction, they are unable to receive any tax benefits for charitable donations. With more taxpayers choosing the standard deduction, taxpayers could be less incentivized to make donations.
The American Enterprise Institute reported there will be a $17.2 billion reduction in charitable donations this year. The reduction in donations will hinder the ability of nonprofits to carry out their charitable missions. However, studies like this tend to focus on more traditional charitable giving. For those who are willing to put in a modest amount of effort, many planning opportunities remain. Taxpayers and nonprofits can still have their cake and eat it too.
Two planning opportunities any taxpayer can explore are “bunching” and a Donor Advised Fund. Bunching is when a taxpayer combines several years’ worth of their charitable donations and donates the collective amount in one year. For example, an individual taxpayer makes a $10,000 donation each year to a nonprofit. With the increase of the standard deduction, the taxpayer will choose the standard deduction, and not be able to realize a tax benefit from his or her $10,000 donation. However, if the taxpayer were to bunch three years of his or her $10,000 donations into one lump sum, the taxpayer could make a $30,000 donation and exceed the new standard deduction threshold. By exceeding the new threshold, the taxpayer will be able to itemize his or her charitable donation and realize a tax benefit.
Donor Advised Fund
A Donor Advised Fund (a “DAF”) is another planning opportunity for taxpayers. A DAF is a separately identifiable account which holds irrevocable donations by a donor and is managed by a section 501(c)(3) organization. The use of a DAF is similar to bunching. With both options, a taxpayer makes a lump sum donation in one year to exceed the new standard deduction threshold and realize a tax benefit. However, a DAF offers additional benefits. A DAF allows the donor to retain advisory privileges on how the funds should be distributed and invested. As a result of those privileges, a donor may choose to distribute his or her donation to a nonprofit or nonprofits over several years. For example, a taxpayer makes the bunched $30,000 donation to his or her DAF account. A taxpayer can choose to advise the 501(c)(3) organization managing the account to make his or her traditional $10,000 donation to a nonprofit for the next three years. Donations in a DAF grow tax-free which means there is more money to donate to nonprofits. Another benefit a DAF provides is that the 501(c)(3) organization handles the management of the account, reducing the administrative hassle and time commitment on the part of the donor.
Bunching and DAFs are two ways a taxpayer can realize tax benefits for charitable donations under the new tax plan. Taxpayers wishing to explore these two opportunities or other opportunities should contact appropriate counsel to discuss their particular circumstances and identify the options that are best for them.
Amanda Brenner‘s primary practice areas are estate planning, business formations, and nonprofit organizations. Ms. Brenner advises clients regarding estate planning; and the formation and operation of nonprofit organizations and private foundations. She graduated from University of Pittsburgh School of Law in 2015.