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One Charitable Minute - Tax Reform Legislation

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A104398
Submitted by Brian.Lavelle on Mon, 03/19/2018 - 10:54

This is a transcript of unscripted speech, rather than written prose, and therefore should not be relied on for grammatical accuracy. This is not a verbatim transcript. Parts have been slightly modified to improve readability.

Kim Laughton:

The Tax Cut and Jobs Act became law in late December and some suggest there could be a significant impact on charitable giving. Hayden Adams from Charles Schwab joins me today to discuss how the new law may affect charitable planning in 2018 and beyond. Hayden is a CPA and a former IRS agent. Now he's the Director of Tax and Financial Planning at the Schwab Center for Financial Research. Welcome, Hayden. Thanks for joining us.

Hayden Adams:

Thank you for having me.

Kim Laughton:

So what are the biggest changes in the new tax law we should be aware of?

Hayden Adams:

The big changes that people are going to see is that the tax rates have been reduced slightly. Some of those rates have gone down. The tax brackets themselves have shifted, so more income is going to go into lower tax rates, and then the standard deduction has been significantly increased.

A lot of the itemized deductions have been limited or some of them have been eliminated. So there are people who may be negatively impacted by some of these changes but there's some planning strategies people can take to mitigate some of that.

Kim Laughton:

When you said itemized deductions have been limited, the charitable deduction has been a very popular itemized deduction. Any changes to the charitable deduction and if so, do you think that will impact giving?

Hayden Adams:

That has been a big talking point lately and nothing has really changed directly affecting charitable contributions and deductions. It's the stuff that surrounds it on the itemized deductions, like the taxes for state and local taxes like that, property taxes. Those have been capped and because those other deductions have been capped, it overall limits the number of itemized deductions people might be able to take and it could push more people into taking the standard deduction. If you take the standard deduction, you don't end up with a benefit for your charitable giving.

I think the reality is most people are going to give because they want to give, not because they get a tax deduction.

Kim Laughton:

Well, we find that. I mean while taxes are definitely an incentive, most people are driven by their philanthropic mission. Let's break it into two different groups. Those people who are already itemizing, have lots of deductions and will probably continue to itemize. Are there any changes in the tax bill that are going to impact them and their ability to get the tax benefit from their charitable giving?

Hayden Adams:

That's a great point because even with these changes and limits on the deductions, there's still going to be people who are always going to end up taking the itemized deduction.

For example, there used to be a 3% limitation overall on your itemized deductions and you could potentially faze out a lot of the value that you'd receive off itemizing. That was removed. In addition, charitable deductions now if you give cash, you can give up to 60% of your adjusted gross income and get a deduction for that.

Whereas in the past, it was 50%. So for higher net worth individuals, there's some good benefit in there for them.

Kim Laughton:

That's terrific news. Now let's talk about the people who are in that larger camp who maybe itemized in the past but will be able to take the standard deduction in the future. How does this new tax law affect them and are there any things they might be able to do or strategies they could take to get the most tax effective benefit out of their giving?

Hayden Adams:

Oh, there's definitely some strategies that can be implemented for these individuals who are kind of at that marginal point where they may or may not be able to take the itemized deduction because the standard deduction has increased so much. For example, let's say you have an individual that traditionally takes about $23,000 of itemized deductions. They have a spouse so they get the $24,000 standard deduction now. Well, because their itemized deductions are less than the standard deduction, they're going to want to take the standard deduction going forward.

But let's say $13,000 of their deductions are related to state taxes, and property taxes, and mortgage, and that kind of stuff, and then $10,000 of it is related to charitable donations. Well, that individual may want to consider instead of doing the $10,000 charitable donation every year, to take and concentrate those deductions into one year. So what they could do is they could go take the itemized deduction one year, and what they could do is take $20,000 of charitable donations plus the $13,000 of their normal other itemized deductions, which gives them $33,000 of deductions that they can itemize.

Then the very next year, they take the $24,000 deduction. The difference between their standard deduction and what that itemized deduction would be, less the charitable contributions, that $13,000, that's that tax benefit that they're going to be receiving. That's a good strategy that some people should consider if they're in that marginal point where they are right in between being able to take the itemized or the standard deduction.

Kim Laughton:

That sounds like a great idea that allows people to get sort of the best of both worlds. The years that they use the standard deduction, they're getting the benefit of that higher standard deduction but every few years when they maybe want to itemize and make bigger gifts, they're getting the full tax benefit of those gifts that they're giving.

Hayden Adams:

Oh, definitely.

Kim Laughton:

So that concentrating giving strategy could really be effective for that group.

Hayden Adams:

It's definitely something that people should consider. And I think one of the best methods to do that is to use a donor-advised fund. They can then donate a large amount into that donor-advised fund and then they can slowly grant it out to the various charities they want over time.

Kim Laughton:

That makes a lot of sense.

It's a really good way to give appreciated investments and assets, which are still tax-advantaged under the new tax law. Right? So when you give appreciated investments to charity, they don't have to pay capital gains tax when they sell them. So if you've got a highly appreciated investment that you've held for a year or more, if you were to sell it yourself, you'd have to pay capital gains tax and be able to give perhaps 80% of the proceeds after taxes. To give it to a charity, you get to give the whole amount.

Hayden Adams:

Oh definitely. And one of the things that people need to focus on with these tax changes is how is this potentially going to impact them positively or negatively, and be able to develop a plan to specifically with their charitable giving, determine where's the best time and place to give that money and exactly how much should they give and when.

Because of all the itemized deductions that you have today, the one that you have the most control over is the charitable deduction.

Kim Laughton:

That's great to hear. So the charitable deduction in many ways is one of the more valuable deductions because it's not being capped. And so for people who are still philanthropically minded it's a good thing to be talking to your financial advisor about.

Hayden Adams:

Yeah. And another thing people should consider is that it's not just about maximizing the deduction in any given year. They should look at strategies in order to maximize their deduction in years where they have high income. if they feel like they're going to have a big windfall when it comes to their personal business and they might have a very large income recognition in one year.

They can use that year as an opportunity to give a large donation to a donor-advised fund or some charity and offset a lot of that income that would otherwise be taxed at a very high rate in that year.

Kim Laughton:

Right. Well that's excellent advice. Thank you so much for being with us and for helping us to decipher sort of the complexities of the tax law and how it impacts clients, investors, and charitable donors.

Hayden Adams:

Well thank you for having me.

Kim Laughton:

So as you plan for the new tax law, Schwab Charitable will continue to provide convenient tools and knowledgeable support so donors can focus on maximizing their impact on the charities and causes that are most important to them. Thanks for being with us.

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