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.
Another avenue available to those of any age is to donate appreciated stock – something many investors have in these hot market conditions – rather than just writing out a check.
Financial adviser Leon LaBrecque, who is based in Troy, Michigan, just had a client donate $20,000 worth of Facebook Inc. stock he had bought for $10,000 into a special account called a donor advised fund. By giving it to charity, the client saved about $8,000 between the value of the charitable deduction and not paying 20 percent in capital gains.
Kelly Pedersen, a financial planner in Bloomington, Minnesota, thinks that donor advised funds – which allow a person to give now and take a deduction, then give the funds away at a later time – will jump if the tax bills go through. "There will be incentive to give as it will be one of the few remaining itemized deductions left to the individual," she says.
If people do not have enough to give one year, they may give once every several years.
Kim Laughton, president of Schwab Charitable, says in the fiscal quarter from July to the end of October, new accounts were up 50 percent and contributions and grants were both up over 30 percent.
Fidelity Charitable has also seen growth. Grants through Thanksgiving 2017 are already running ahead of last year at $3.6 billion, over $3.5 billion for all of 2016, according to Lisa Dalberth, chief administrative officer at Fidelity Charitable.
For those making last-minute decisions about giving in 2017, beware of the calendar. Dec 31 is a Sunday, notes Eileen Heisman, CEO of the National Philanthropic Trust, which is one of the top 25 donor advised funds. To have your donation count, it needs to be processed on a day the stock market it open, or post marked by Dec. 30 by the U.S. postal service.
This article was provided by Reuters.
