CHARITY IN THE AGE OF TRUMP
Under the new tax law, fewer americans will get deductions for their charitable contributions. but wealthy and older donors and those who plan ahead will do fine, says giving guru robert sharpe Jr.
Under the new tax law, fewer Americans will get deductions for their charitable contributions. But wealthy and older donors and those who plan ahead will do fine, says giving guru Robert Sharpe Jr.
In the 1990s, when Robert Sharpe Jr. and his brother took over the Sharpe Group from their dad, Memphis got a renovated planetarium. How did that work? Sharpe Sr., who started the family business, which structures charitable gifts to minimize taxes and maximize impact, donated company stock to a charity, and his sons bought the stock back over time, with their payments funding the planetarium. The maneuver saved the family a heap in income, estate and gift taxes. The renamed Sharpe Planetarium got spiffy new sound and automation technology and seating that finally gave the audience a full view of its dome.
But such civic largesse could be rarer in the Donald Trump era. The tax overhaul the president signed in December chops the number of families with an incentive to do such deals: It doubles—to $22.4 million—the amount a couple can pass to heirs, tax-free, without any charitable gambits. It also halves—from 21% to 9%—the share of individual income tax filers benefiting from itemized charitable deductions. That could cost charities as much as $20 billion a year in donations, according to estimates from the nonpartisan Tax Policy Center.
Sharpe, 64, argues that the changes needn’t
reduce giving as much as charities fear. One reason: There are techniques middle-class folks— and particularly retired ones—can use to claw back charitable tax breaks the law took away. Another: Two obscure provisions in the new law fatten the tax benefits for richer donors. “The real winners in this, as in the rest of the tax bill, are the wealthiest people,” Sharpe says.
Still, the individual tax changes (which, owing to congressional gamesmanship, expire after 2025) are a very big deal. The law nearly doubles the standard deduction to $12,000 for a single ($13,600 for a single 65 or older) and $24,000 for a married couple ($26,600 if both partners are 65 or older), while eliminating various miscellaneous itemized deductions and capping the deduction for state and local real estate, income and sales taxes at just $10,000 per tax return. Deductions for charity? They’re still allowed—but benefiting from them is harder.
Consider a 65-year-old couple who have paid off their house (interest on mortgage debt of up to $750,000 is deductible) and don’t have high out-of-pocket medical expenses (which are deductible only to the extent they exceed 7.5% of adjusted gross income). The one noncharitable deduction they have left: $10,000 in state and local taxes, no matter how much they’re really paying. This means they’d have to donate more than $16,600 for their itemized deductions to exceed their standard deduction of $26,600. In effect, they get no tax savings from their first $16,600 of giving.
Sharpe suggests taxpayers bunch contributions so they can benefit from itemized deductions in certain years. The best way to do that is to give a large amount (preferably of appreciated stock) to what’s known as a “donor-advised fund”: You claim a big tax deduction in one year, and the fund (at your direction) dribbles out money to your favorite charities over time. Four of the largest DAFs are affiliated with financial companies: Fidelity, Goldman Sachs, Schwab and Vanguard. In addition, scores of community foundations, as well as individual charities, offer DAFs.
And get this: As our 65-year-old couple ages, they have an even better option—the charitable IRA rollover. This technique wasn’t changed by the new law but, with the changes to itemized deductions, “is more important now than ever before,” Sharpe says. It works like this: Those who are 70½ or older must take taxable required minimum distributions (RMDs) each year from their pretax IRAs. But they can transfer as much as $100,000 a year directly from their IRAs to charity and it will qualify as an RMD, without counting as income on their tax returns. (A side benefit: This can also reduce or eliminate “highincome” Medicare premium surcharges that top out at $10,286 a year for couples with income of $320,000 or more.)
“I’ve never taken an RMD and put it in my pocket,’’ says Michael Fleishman, a 73-year-old corporate lawyer in Louisville, Kentucky, who grew up poor and couldn’t have gone to Tulane Law School without a scholarship. He’s been directing $100,000 a year from his IRA to his alma mater to fund a professorship in entrepreneurship. “It has allowed me to double the size of the gift that I was going to make anyway,’’ he explains. He also makes additional, non-IRA donations.
As Fleishman illustrates, older donors tend to be among the most generous. That’s why they stand to benefit from another change in the tax bill: an increase—from 50% to 60%—in the share of adjusted gross income that can be wiped out by cash donations to a public charity in any year. Unused charitable deductions can be carried forward for five years; those 65 and older report 76% of charitable carryforwards, even though they’re just 16% of all tax filers.
This isn’t simply a case of deductions deferred. Some retirees are so generous that they bump up against the limit year after year and never get to use their carryforwards. Others who hit the limit are retiring small business owners aiming to make a big charitable gift with cash proceeds from the sale of their businesses. For them, the deductions are more valuable in the year of sale, when they have a big lump of income and pay a higher tax rate.
Plus, Sharpe points to yet another win for well-off donors: The new law suspends the “Pease” provision, which gives a haircut to all deductions claimed by high-income taxpayers. Take a couple with $2 million of AGI who make a $300,000 gift of appreciated stock. For 2017, Pease required them to reduce their itemized deductions by $50,586 (3% of the amount their income exceeded the Pease threshold of $313,800). But this year, they will be able to claim the full $300,000 deduction, saving an additional $12,232 in tax, Sharpe calculates.
finAl thought
“The greatest tax simplification would be to have the law remain settled for several years so we could all catch up.” —Sheldon S. Cohen