Charitable Giving During a Pandemic – Part 1

Amid the chaos, a beautiful thing happened this year.

Amid the haze and hardship that COVID has wreaked around the globe, compassion, community, and humanity continue to shine. In April, while more than 23 million workers were out of work in the United States and unemployment peaked at an all-time high of nearly 15%, Americans were giving.

As you might imagine, a large portion of donations went to food banks, social services, and COVID- focused organizations.  In the past decade, the percentage of Americans who give has declined. However, recent surveys by Gallup and Campbell Rinker have reported that most plan to retain and even increase their donations to nonprofits in 2020, while only a small number intend to reduce donations.

That is a huge relief to the nonprofit community on the heels of the Tax Cut and Jobs Act of 2017 (TCJA), which many feared would disincentivize taxpayers from focusing on charitable planning. With only two tax filing years behind us post-TCJA, it is hard to know what the long-term effects of the legislation will be. However, fears of smaller donor bases and fewer donations has once again accelerated amid the backdrop of a global pandemic and related economic woes.

In this series, we will explore some of the recent changes to the giving environment since the TCJA of 2017—and now in the context of COVID and the related Coronavirus Aid, Relief, Economic Security Act (CARES). In a later post, we will describe new and emerging planned giving strategies that allow individuals opportunities to be generous while also taking advantage of tax incentives.

What are the recent changes to tax legislation?  How do these changes affect charitable contributions?

The Tax Policy Center estimates that the TCJA may affect as many as 21 million taxpayers who previously donated to qualifying charitable organizations. The legislation, which became effective in 2018, limits the ability for many tax filers to claim tax benefits for their charitable endeavors.

You may recall that TCJA limited a taxpayer’s ability to itemize his or her deductions by effectively doubling the amount of the “standard deduction” for a single filer in 2018 from what would have been $6,500 to $12,000 (the standard deduction for tax filing year 2020 is now $12,400).

The standard deduction is a deduction from a filer’s taxable income. Taxpayers may choose to deduct the higher of either the standard deduction or the total of his or her itemized deductions, which include a number of eligible expenses related to medical expenses, mortgage interest, state and local income taxes, and, notably, charitable deductions.

The significance of this change is that taxpayers with itemized deductions totaling less than $12,400 will claim the standard deduction rather than itemize deductions. Previously, those same filers may have benefited from itemizing deductible expenses such as charitable planning contributions. In short, taxpayers had great financial incentive to make charitable contributions previously, and many of the incentives no longer exist.

As you might imagine, this has caused great concern in the nonprofit arena.

Simultaneously, the TCJA eliminated the “personal exemption” and placed limitations on the amount that could be deducted for various expenses, including:

• Mortgage Interest Deduction—Mortgage interest deductions are now limited to the first $750,000 of acquisition indebtedness, and interest paid on home equity lines is no longer deductible. Previously, deductions were permitted up to $1 million of debt principal (prior purchases are grandfathered in under the new legislation).
• State and Local Taxes (also known as the “SALT” deduction)—The maximum deduction for state and local income taxes and property taxes paid is $10,000. Previously, there was not a maximum level for state and local taxes, which benefited tax filers living in high-tax areas.
• Miscellaneous Itemized Deductions—Deductions that fell into this category have been eliminated entirely. However, many filers were unable to claim deductions in this category previously, as the deductions had to exceed a certain percentage of a filer’s Adjusted Gross Income.

(Interestingly, the limitations on the above deductions are the same for taxpayers filing Single or Married Filing Jointly.)

Suffice it to say, the TCJA made it significantly harder to file a tax return with itemized deductions, which has the potential to negatively impact contributions to nonprofits.

To illustrate the point – Imagine a couple (both spouses retired), who claimed the following deductions totaling $37,000 in 2017:

• Zero mortgage Interest (their mortgage was paid off in full)
• SALT deductions of $25,000
• Miscellaneous itemized deductions of $5,000
• Charitable deductions of $7,000
• Total deductions: $37,000

In 2017 the imaginary couple would have itemized their expenses rather than take the standard deduction—then $12,700 for a married couple filing jointly—since their itemized deductions were greater than the standard deduction.

Assuming all variables remain the same, under the TCJA that same couple would be eligible for the following deductions totaling just $17,000, as compared to $37,000 in the prior year:

• Zero mortgage Interest (their mortgage was paid off in full)
• SALT deductions of $10,000 (even though they paid $25,000 in state and local taxes)
• Zero miscellaneous itemized deductions (Even though they had expenses totaling 5,000)
• Charitable deductions of $7,000
• Total deductions: $17,000

As a result, the sample couple would claim the standard deduction of $24,800 in 2020 since the standard deduction exceeds their total itemized deductions ($17,000).

In fact, our sample client would not be eligible to claim any itemized deductions until they had incurred an additional $7,400 in itemized deductions—and only at that point would itemizing their deductions break even with the amount of the standard deduction anyway.

Some might argue this client no longer has a financial incentive to make charitable donations. However, we have culled through the details to identify nuggets of opportunity that we hope will continue to incent you to give while also reaping a tax benefit during a time of much need. Stay tuned to learn more about some of these strategies in our next blog post.

Of course, understanding the timing and application of which strategies will maximize your own particular tax filing situation is important. We highly recommend speaking with a Certified Financial Planner professional and your tax advisor about how these strategies might apply to your individual planned giving strategy.

About the Author:

Jane Delashmutt O’Mara, CFP® brings more than a decade of experience working in financial services to her practice. Jane believes that client education and compassion are vital to the financial planning process. Whether she’s working with a client to plan for retirement or navigate a major milestone such as marriage, divorce, or loss of a loved one, she enjoys educating and empowering her clients. Jane also enjoys working with families with unique or complex estate planning needs. Contact her by calling 410-822-0813 or email jane@fbbcap.com.