The price of giving: Tax reform’s impact on charitable donations
If you make substantial donations to charity, it is important to evaluate the impact of the Tax Cuts and Jobs Act (TCJA) on the “price” of your gifts. Even though charitable giving is motivated primarily by compassion and generosity rather than the availability of tax incentives, the after-tax cost may affect the amount you are willing or able to give.
The TCJA contains several provisions that decrease the tax advantages of charitable gifts for many people (and one provision that boosts the benefits of certain cash gifts). However, be aware that most of the TCJA’s individual income tax provisions are scheduled to expire at the end of 2025.
Tax rates lowered
The TCJA cuts tax rates for most people, which makes charitable giving more expensive. For example, assume that a married couple donates $10,000 to charity each year. Last year, they were in the 39.6% tax bracket, so the after-tax cost of their donations was $6,040. This year, they find themselves in the 35% bracket, increasing the after-tax cost to $6,500.
Standard deduction raised, itemized deductions limited
The TCJA’s changes to standard and itemized deductions also increase the cost of charitable giving. It nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. In addition, it:
- Eliminates most itemized deductions, although it retains the write-offs for charitable contributions and certain other expenses;
- Limits deductions for state and local taxes to $10,000;
- Limits deductions for new mortgages to interest on up to $750,000 of indebtedness (down from $1 million); and
- Eliminates, in certain circumstances, the deduction for interest on up to $100,000 of home equity debt.
These changes mean that more taxpayers will be taking the standard deduction rather than itemizing, which eliminates the tax benefits of charitable giving. For example, let’s say a married couple has $7,000 in deductible mortgage interest expense, is limited to $10,000 in deductions for state and local taxes, and has no deductible medical expenses. The $24,000 standard deduction means they will receive no tax benefit on their first $7,000 in charitable donations.
Planning tip: Bunch charitable deductions
One way to boost the tax benefits of charitable giving is to bunch your donations into alternating years. Suppose the couple in the example above ordinarily donates $6,000 per year to charity. They can enjoy additional tax savings by donating $12,000 every other year instead. So, for example, they might claim the standard deduction ($24,000) this year and take $29,000 in itemized deductions next year ($10,000 in state and local taxes, $7,000 in mortgage interest and $12,000 in charitable donations). This strategy generates an additional $5,000 in deductions over a two-year period.
If you do itemize, keep in mind that the TCJA increases the limit for cash gifts to public charities and certain private foundations from 50% to 60% of your contribution base — generally, adjusted gross income (AGI). Other contributions continue to be limited to 50%, 30% or 20% of AGI, depending on the type of property donated and the type of charitable organization. As before, excess contributions may be carried forward up to five years.
No deduction for college sports
The TCJA also eliminates deductions for donations to colleges and universities in exchange for the right to purchase season tickets to athletic events. Previously, these donations were 80% deductible.
Estate tax exemption doubled
The TCJA doubles the gift and estate tax exemption for deaths and gifts after December 31, 2017, and before Jan. 1, 2026. In 2018, the inflation-adjusted exemption is $11.18 million ($22.36 million for married couples). With only 2,000 or so families in the U.S. now subject to estate tax, the vast majority of taxpayers will not benefit from charitable vehicles, such as charitable remainder trusts that are designed to reduce estate taxes.
Should charities be worried?
A number of not-for-profit organizations opposed the TCJA, fearing it would devastate charitable giving. Although several of the TCJA’s provisions increase the after-tax cost of charitable donations, they are also expected to reduce most individuals’ tax bills, at least during the first eight years. Many commentators believe that lower taxes combined with anticipated economic growth will spur an increase in charitable giving. This view is consistent with studies showing that charitable giving in the United States consistently falls at around 2% of disposable income.
The same goes for charitable giving at death. Even though the tax incentives associated with charitable bequests have been eliminated for most people, the doubling of the estate tax exemption means that many people will have more money available to give away.
Revisit your charitable giving plan
If you are charitably inclined, now is the time to review your plan to assess the TCJA’s impact. Knowing the price of your gifts will help you determine whether any adjustments are necessary or desirable.
Sidebar: Charitable IRA rollover: No need to itemize
If you are 70½ or older and plan to make charitable gifts, consider a qualified charitable distribution (QCD) from an IRA — also known as a charitable IRA rollover. This strategy allows you to transfer up to $100,000 per year directly from an IRA to a qualified charity, tax-free, and to apply that amount toward any required minimum distributions (RMDs) for the year. Because the funds are not included in your income, it is the equivalent of a $100,000 charitable deduction, without the need to itemize.
The QCD is an option for people who otherwise would not be entitled to a deduction, because they claim the standard deduction or because their deductions are reduced by AGI limitations.
Are you personally liable for your company’s payroll taxes?
When a business fails to remit payroll taxes, the IRS has the authority to collect those taxes from responsible persons, including certain shareholders, partners, officers and employees. The IRS takes an expansive view of who constitutes a responsible person.
Definition of a responsible person
In this context, a responsible person includes anyone — within or outside the company — with significant control or influence over the company’s finances. This control or influence can be derived from an ownership interest, job title, check-signing authority, hiring or firing authority, control over the company’s payroll, or power to make federal tax deposits.
The IRS is also liberal in its interpretation of the term “willfully.” It includes not only those who intentionally fail to remit payroll taxes, but also those who “recklessly disregard” obvious or known risks of nonpayment. However, the IRS will not impose trust fund penalties on a responsible person who is negligently unaware of a payroll tax default.
It is important to understand that you cannot avoid liability for trust fund penalties by delegating payroll tax responsibilities to someone else, whether it is another employee or a third party, such as a payroll service provider. They may also be responsible person by definition, but relying on them does not mean you are off the hook. (See the discussion of CPEOs, below.)
A case in point
A recent case demonstrates the lengths that the IRS will go to in order to collect unpaid payroll taxes. In Shaffran v. Commissioner, the IRS assessed more than $70,000 in trust fund penalties against a 77-year-old man whose only connection to a business (a restaurant co-managed by his son and the restaurant’s owner) was that he had signed a few checks for the business when neither manager was available.
Shaffran visited the restaurant two or three times per week for several hours, where he sat around at the bar and occasionally acted as a gofer for the managers. He occasionally prepared checks for his son to sign and he signed four checks (two for suppliers and two for loan payments) when the managers were unavailable. The bank honored the checks even though Shaffran was not an authorized signatory on the account.
The U.S. Tax Court ultimately concluded that Shaffran’s activities and authority did not rise to the level of a responsible person. Nevertheless, he was forced to invest time and money to prove his lack of responsibility and to endure the stress of litigation with the IRS.
Consider a CPEO
Many businesses use professional employment organizations (PEOs) to handle a variety of employment-related tasks, including collecting and remitting payroll taxes. However, using a PEO does not relieve a business or its responsible persons from liability for unpaid payroll taxes. However, a business may avoid liability by using a certified PEO (CPEO). Because a CPEO is treated as the employer of its customers’ workers, it retains sole responsibility for all related payroll tax obligations. Contact your advisor to help determine if a CPEO is right for your company.