The tax law enacted as a 2017 Christmas present to Americans by the administration and Congress, the Tax Cuts and Jobs Act of 2017, has had an impact on the structure and amount of charitable donations. Even now, may years later, the impact lingers on and is being discovered by more people even as they prepare their taxes in 2024 for the tax year of 2023. Congress is always trying to make changes in the law, and has made some changes, but some of the major impacts remain.
A brief explanation of the tax laws and how these changes affect most Americans is in order.
In the Past, The Tax Code Has Promoted Charitable Donations
In the past, the charitable deduction has allowed taxpayers who itemize to make a gift to their favorite charity and benefit from what amounts to a matching gift by the U.S. Treasury. Giving $5,000 to a charity has an effective cost of $3,250 for a family in the 35% marginal tax bracket. The charity receives the $5,000 and the donor gains a $5,000 tax deduction, a tax benefit of $1,750. The net result is that effectively the taxpayer donates $3,250 while the U.S. Treasury donates $1,750.
But the Promotion Is Still Shaped Very Differently
The bill Congress passed just before Christmas, 2017, raised the standard deduction on tax returns for every year after that (but things can still change) to $12,000 for individuals and $24,000 for married couples (and even higher amounts for seniors). That will eliminate for many Americans the benefit of itemizing deductions for property taxes (also limited under the new act), mortgage interest and charitable giving. Most taxpayers will be better off taking the standard deduction as they would get no tax benefit and no deduction for charitable donations, including donations to their church.
Among households in the $75,000 to $100,000 income range, some have estimated that only approximately 10 percent will gain any benefit from charitable deductions under the new law. Previously that was closer to one third of taxpayers. In other words, almost two-thirds of high dollar donors will lose the tax benefit of charitable donations. If you move to even higher income Americans, the change is almost as dramatic. In the income range of $100,000 to $200,000, the decrease of people itemizing has been from the range of 50 percent all the way to below 20 percent who itemize. For more detail on these changes, see GOP tax law a one-two punch to charities — and American giving.
To really understand what has happened, see this illustration comparing 2017 to 2018 and the future. A middle-aged married couple, the Joneses, has traditionally tithed 10% of their joint income of $120,000. That donation was $12,000 because the tithe is on the gross, not the net income (the old joke is, “do you want gross or net blessings!”) They had additional deductions including the home tax real estate bill, medical expenses due to a high cost surgery last year, as well as HSA and IRA deductions making their deductions $17,500, well above the standard deduction amount for them in 2017, $12,700. So, in 2017, they tithed and itemized.
But then along comes 2018 (and 2019 and beyond) and the new tax code. Even assuming another medical emergency, the family’s deduction are far short of the new $24,000 standard deduction for a married couple. Now the Joneses may re-think their tithing and realize they get absolutely no tax benefit for tithing, no “subsidy” or matching payment by the U.S. Treasury. Ideally, their faith and trust in God is sufficiently mature that they keep tithing.
But perhaps their faith is not that strong and their dedication to their church is waning. Not-for-profits, including churches, had significant concern that small and even moderate donors would cut back on or stop most giving because of the loss of a tax incentive, at least once the impact was discovered. Charities knew that unless their donors have a passion or conviction about their charitable purpose or are mature believers trusting wholly in God, donations might stop or at least decrease. Experience has shown that concern was justified, at least to some degree. What we have seen is a decrease in charitable donations when they are adjusted for inflation. That decrease has accelerated post-pandemic, especially with so many facing inflation.
So, how can most people still donate and get a tax benefit?
There are three primary strategies that have been proposed so far. The first and last work for all persons while the second works only for persons 70 ½ or older in 2018.
Bunching has been a strategy available for years but it has been less important in the past, before the new tax code and its much higher standard deduction. Now, bunching is likely to become a more common strategy, at least among those with the financial liquidity to use it.
Anyone can bunch by, for example, doubling charitable donations one year and eliminating charitable donations the next year. No charity will recommend that, however, because that would produce chaotic accounting, budgeting and financial difficulties for charities.
A more effective and helpful form of bunching uses a Donor Advised Fund (DAF) such as the DAF you can establish through The Idlewild Foundation and the National Christian Foundation. And you need to understand how to use it effectively.
DAFs have become popular in recent years. They now account for close to 5% of all charitable donations in the U.S. The primary benefit of the DAF is your ability to separate the time of the tax deduction from the date when your favorite charities receive the funds. You donate to your DAF, get the charitable donation on that donation date because your DAF is itself a charity. But the money is held in your DAF. When you decide to, you make grants to your favorite charities. See Ways to Give. The funds in your DAF are not yours to use as you wish, only yours to give by a grant to a 501(c)(3) charity of your choice. You can give a grant to your charity of choice a day, a week, a month or even more than a year after you donate to your DAF.
DAFs have both advantages and disadvantages. Among the advantages are the ability to donate now and decide later which charity will benefit and how much will go to each charity, a convenience especially helpful late in the year. Also, you have one charity to deal with and only one line item on your tax return for itemization of charitable deductions, there are no stacks of receipts and records to maintain. DAFs are also fast and easy to set-up and maintain and they keep your specific charitable donations confidential. One the other hand, many DAFs have account minimums (the National Christian Foundation does not), and there are costs to maintain the fund.
There is another substantial benefit not readily apparent at first glance. Since your deposit into your DAF is a charitable donation itself, the donation of appreciated securities or property passes without capital gains taxes coming due. You get a deduction for the full value of the donation but none of the tax cost on the gain! For more details, see The Really Smart Gift of Real Estate, Innovative Non-cash Gifts, and Give First, or Sell First, Then Give.
Now that you understand how DAFs work, let’s look at bunching. It works this way if you have sufficient funds: You pick one year out of two or three to make charitable donations to your DAF. Rather than make the donations directly to the individual charities, instead, you make a double or triple donation to your DAF, “storing” it for future distribution to your selected charities. Let’s pick 2023 as an example. In 2023 make your charitable donations for 2023, 2024 and 2025 into your DAF. Thus, if your normal charitable contributions for a year are $10,000, instead, in 2023 you make $30,000 in donations to your National Christian Foundation DAF. Then, over the three years, you give grants out of your DAF to your charities totaling $10,000 each year. In 2023 you itemize and get a charitable deduction of $30,000, then in 2024 and 2025 you take the standard deduction of $24,000 for a couple. Your donations are level, your select charity does not have radical surges of donations, and you get to bunch your charitable donations for tax purposes. Be aware that changes in the tax laws and tax tables can dramatically impact these results.
For the year in which you bunch your contributions to your DAF, so long as the contribution is large enough, you may itemize instead of taking the standard deduction. In the other years you take the standard deduction.
However, if your overall annual charitable giving is less than $2,500 a year bunching is not likely a good approach because the amount you would have to put in in the high donation year is simply too high a percentage of disposable income. Most people who give those amounts could not give enough in one year to a DAF to make the process meaningful for tax purposes.
The supporters of the new federal tax law believe it will provide Americans with more disposable income, which could increase charitable giving. That remains to be seen. It seems unlikely that the increase in some small donor’s incomes will offset the loss of motivation for two thirds of the small donors. More importantly, charities and churches must rely on their mission more than on their government. If people believe strongly enough in the mission, giving may not decrease significantly.
This also is an old strategy that is also now more important thanks to the new tax code.
If you are over 70 1/2 (or 72, depending upon when you reached 70 1/2 because now the limit is 73), you can effectively get the full benefit of your charitable contribution even if you do not itemize! Even better, you can avoid the new 60% of income limit on charitable donations and satisfy your Required Minimum Distribution (RMD) requirements. But be aware that changes to the law impacted the “Required” part of Required Minimum Distributions (RMDs). Ask your tax adviser for up-to-date advice.
How can you get a tax savings without taking a deduction? By making a Qualified Charitable Distribution (QCD) from your IRA for an amount of up to $100,000. This does not give you a charitable deduction, instead the distribution from your IRA is never counted as income! The cautionary point is this. The distribution from your IRA must go directly to the charity and never to a DAF, to yourself or to your bank account. See IRA Charitable Rollovers. The details of RMDs and QCDs are frequently changing, so please consult with your tax or financial adviser.
This third strategy estimates the “cost” to you of the changes to the tax laws. Under this strategy you adjust your donations down to the net of your previous year’s donation taking into account the tax benefit.
For those who itemized tax deductions in 2017 and previous years but will no longer itemize because their standard deduction will be higher, here is how it can work.
During 2023, give the amount of your 2017 net cost for your donations in 2017. If you used to donate $5,000 annually and $1,250 was written off as an itemized deduction in the 25 marginal percent tax bracket, adjust your giving downward to $3,750 in the future, the 2017 net cost to you of your donation. If you donated $10,000, give $7,500 and if you donated $12,000, give $9,000.
The result is no meaningful impact on your taxes or your spendable income. In fact, you might end up with more net cash even without doing this because 90% of Americans can’t itemize and get more tax benefit from the standard deduction. Thus, you get no tax benefit from giving – but you weren’t giving for the tax benefits anyway – giving is an act of worship and obedience.
However, there are multiple considerations for you. First, if it is your tithe you chose to trim because of the new tax bill, you may want to reconsider this strategy. God made your income and ability to work possible. Is your gift to Him really solely dependent upon the tax laws?
18 But remember the LORD your God, for it is he who gives you the ability to produce wealth, and so confirms his covenant, which he swore to your ancestors, as it is today.
Also, you should consider if there are the other areas you need to trim before you trim your donations to your church and to God. See Ideas for Living Better Through Stewardship, 7 Steps for Financial Progress and It’s Time to Start Saving. These ideas and opportunities to save were designed primarily for young adults but they work well for all ages. And think about what you are saying to God and to your children. Do you really want to start to trim God out of your finances? Really?
Taking from God to benefit selfishly has historically proven to be a poor financial strategy. See Malachi 3 and Haggai 1:5-9.
5 Now this is what the LORD Almighty says: “Give careful thought to your ways.
6 You have planted much, but harvested little. You eat, but never have enough. You drink, but never have your fill. You put on clothes, but are not warm. You earn wages, only to put them in a purse with holes in it.”
7 This is what the LORD Almighty says: “Give careful thought to your ways.
8 Go up into the mountains and bring down timber and build my house, so that I may take pleasure in it and be honored,” says the LORD.
9 “You expected much, but see, it turned out to be little. What you brought home, I blew away. Why?” declares the LORD Almighty. “Because of my house, which remains a ruin, while each of you is busy with your own house.
The people of Israel took from God for themselves, and God took it back! The clear truth is that charitable organizations and churches will still need your heartfelt and loving support under the new tax law, perhaps even more because some who are less understanding and far less committed will stop or reduce giving. We were made by God to be generous on every occasion, 2 Corinthians 9:11.
2 Corinthians 9:11
11 You will be enriched in every way so that you can be generous on every occasion, and through us your generosity will result in thanksgiving to God.
And we know from the Apostle Paul that our hope is not in the wealth of this life, not even in the wealthiest and most prosperous country in history. Our hope lies in God and our relationship with Him. We are to be generous and willing to share so that we lay up a foundation for eternity with God.
1 Timothy 6:17-19
17 Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment.
18 Command them to do good, to be rich in good deeds, and to be generous and willing to share.
19 In this way they will lay up treasure for themselves as a firm foundation for the coming age, so that they may take hold of the life that is truly life.
Will any or all of these ideas work for you? Please check first with your financial adviser and your tax accountant because the details of your personal finances and investments, your age, your investment mix, your family circumstances and what the government may change might make a different strategy best for you. More than anything, we want you to start thinking and praying about what God would have for you and the money He has allowed you to have and hold. Please do think and pray about the tax issues you face for 2023 under the tax law and a very fast-moving financial environment, and may those prayers be answered.
About the Author
John Campbell has retired from a 40-year legal practice as a trial attorney in Tampa. He has served in multiple volunteer roles at Idlewild Baptist Church in Lutz, Florida, where he met Jesus. He began serving as the Executive Director of the Idlewild Foundation in 2016. He has been married to the love of his life, Mona Puckett Campbell, since 1972.