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

Char­ity be­gins at home: As the fa­ther of five daugh­ters, sharpe does vol­un­teer work for girls inc. of Mem­phis, ded­i­cated to teach­ing young women en­tre­pre­neur­ial skills.

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