Hello again, friends!
In this 2-part series, we are tackling the new tax changes and what they mean for charitable giving. In the last article, we looked at itemized vs. standard deductions, “bunching”, and the Qualified Charitable Distribution. If you haven’t yet read Volume 1, I highly encourage you to start there and then come back and read the rest of this article.
First, let’s look at the only actual change to the tax code that relates directly to charitable giving. The itemized deduction limitation on charitable gifts of cash increased from 50% of AGI to 60% of AGI and will return to 50% at the end of 2025. The limit for deducting capital gains gifts (stock, real estate, etc.) did not change. It remains at 30% of AGI.
To understand this change, we must first understand AGI or “Adjusted Gross Income”. AGI is the total of all of a taxpayer’s taxable income, minus “above the line deductions”. These are deductions that are not itemized. They are available to anyone – no matter if they itemize deductions or not.
You don’t need a detailed understanding of AGI to understand this recent change. You just need to know that charitable deductions are limited based on your overall income. Let’s look at an example to help us learn.
Let’s say your AGI for 2018 is $100,000. You are feeling exceptionally generous, so you give away that entire $100,000 in cash to your favorite charities. Your itemized charitable deduction is limited to$60,000 (60% of $100k AGI). The remaining $40,000 of deduction is not lost. It’s still available – you just have to “carry it forward” to a future tax year. You will have another 5 consecutive years to use it all up. Virtually all gifts allow for this 5 year carry forward.
In 2017 the same scenario would have resulted in an itemized charitable deduction limitation of $50,000 or 50%. The remaining $50k would be carried forward for 5 more years until used up.
I know what you’re thinking. “That’s not a very significant change.” Over 6 years (gift year + 5), the taxpayer in both situations will have used up the same $100,000 of charitable deduction. I completely agree. It’s not a significant change, even if someone makes much larger gifts and has a much higher AGI. Either way, it only results in a slightly accelerated use of the itemized charitable deduction and it only matters to people making large gifts in relation to their overall income.
Everything Else Stayed the Same!
That’s right, all the other rules relating to charitable giving stayed the same. No changes were made to the rules governing:
- Charitable Gift Annuities
- Charitable Remainder Trusts
- Donor Advised Funds
- Qualified Charitable Distributions (best thing since sliced bread!)
Thank Goodness, right? The rules around CRTs and CGAs are complicated enough. Nothing new to learn there.
Where’s the Opportunity? You Promised Me an Opportunity!
When was the last time you worked with a donor who gave more than 60% of her income to charity in one year? They’re out there, but not around every corner. This leads me back to a point I’ve been making for a long time. People don’t give large gifts out of income. They give large gifts from their asset base. They’re giving large gifts of stock, real estate, QCDs, farmland, farm machinery, business interests, etc. Remember, only about 5%-10% of America’s wealth is held in cash. The rest is in assets.
This is the opportunity and the messaging all rolled together. Start encouraging asset giving. Say it in your meetings, your digital communications, and your print communications. Regularly remind donors that they can give things like stock, real estate, life insurance, in many cool ways. Encourage them also to consider using these assets to fund charitable gift annuities and charitable remainder trusts – gifts that give back!
Even if your organization doesn’t accept complex assets or issue it’s own charitable gift annuities, do not despair. There are plenty of partner organizations out there, such as community foundations, and corporate gift funds that would be delighted to help your donors make these more complex gifts possible. Get to know them. Strike up a friendship with one or more of these organizations now so that when your donors want to make a big complex gift, you’ll be prepared and not running around in circles in your office wondering “how am I going to make this possible?!?!?!”
Focus on Mission – Not Deductions
Remember that when you ask a donor for a gift you are giving them an opportunity to:
- Give meaning to their wealth
- Pass on their values to future generations
- Be remembered for something greater than themselves
It’s so important that we focus on our missions, not tax benefits. Yes, deductions are nice, but aren’t the primary reason people give. When you can match your mission to a donor’s goals, you’ve struck gold.
Want to Know More About Asset Giving?
If you’ve read up to this point, bet you’d like to know more about asset giving. You’d like to know better how things like Charitable Gift Annuities work, and how the heck you give crops, cows, and life insurance. I invite you to learn with me in a 10 part program I call Turning Wealth Into What Matters™. I guide both fundraisers and professional advisors through the mysterious world of gift planning so that you can start taking advantage of these kinds of gift techniques, bring value to donors and clients, grow your donor base/business, and put all that generosity to work.
Dana is a professional speaker, consultant, educator,and the creator of Turning Wealth Into What Matters™, a Growth Program for Fundraisers and Professional Advisors.