By James Enriquez, Guest Writer

The Tax Cuts and Jobs Act changed many things within the tax code, such as eliminating personal exemptions, increasing the standard deduction, lowering the top tax rate, and reducing the number of tax brackets. However, many of those changes are scheduled to “sunset” back to the “old” pre-TCJA tax regime of 2017.

Now that a new presidential administration will be installed in January, many have speculated that the TCJA or certain provisions will be extended. Nevertheless, the strategies contained in this post are still relevant, but the rationale behind the strategies might change if some or all of the TCJA is extended. In fact, an extension would further support the strategies discussed later.

This article will explore examples of where it still may make sense for taxpayers to accelerate deductions through charitable contributions. Before the exploration of examples, an understanding of how the charitable contribution deduction works currently and how it worked pre-TCJA is necessary. Then, this post will look at a case study and a way that a Donor Advised Fund can help taxpayers take full advantage of the possible sunsetting of TCJA by bunching charitable contributions.

 

Charitable Contribution Deduction

Charitable contributions are an itemized deduction, and according to the Tax Policy Center, only 10% of 2020 filers itemized due to the large size of the standard deduction under the TCJA (the standard deduction will increase again in 2025, going from $14,600 single/$29,200 MFJ in 2024 to $15,000/$30,000). Since charitable contributions are an itemized deduction, they are included with other itemized deductions like mortgage interest and property taxes. Most people do not itemize if their itemized deductions are not more than their standard deduction, and you will not get a tax benefit for your charitable contributions if you take the standard deduction.

 

Donating Cash

Before TCJA, taxpayers could deduct up to 50% of their Adjusted Gross Income (AGI) if donating cash. TCJA increased it to 60%. Quick side note: in response to the pandemic, the CARES Act temporarily increased the limit to 100% of AGI. That limit has since reverted to TCJA limits of 60%.

Example: In 2017, Jill donated $55,000 cash to her favorite charity. Since her AGI was $100,000. She only could deduct $50,000 due to the 50% of AGI limit. The rest of her charitable contributions had to be carried over to the following years, which will be discussed later. The following year, she made her annual $55,000 cash donation to the same charity. Thanks to the increase afforded by the TCJA, she could deduct the full amount since it was less than the increased limit of 60%.

More information here:

How Donating to Charity Is a Tax Advantage

 

Donating Long-Term Capital Gain Property

The charitable contribution deduction limit has not changed if donating long-term capital gains assets, such as stocks and bonds. The deduction amount is the fair market value of the property at the time it is donated up to a limit of 30% of AGI. This limit impacts donating items such as appreciated stock or property held for longer than a year. An extra tax benefit is the fact that capital gains are avoided by contributing long-term capital gain property to charity.

Example: Jill bought $10,000 of XYZ stock in 2019. This year, she decided to donate it to charity when the fair market value of XYZ stock was $30,000. Since her AGI is $100,000, she can deduct the full amount of her donation.

 

Donating Short-Term Capital Gain Property

Short-term capital gain property—property held for a year or less—is considered “ordinary income” property and is subject to different rules. The amount of the charitable contribution deduction is generally the cost basis up to 50% of the AGI limit. The fair market value can be used if you include the ordinary or capital gain income in your gross income in the same year as the contribution.

Example: Jill bought $10,000 of ABC stock on January 1, 2024, and five months later, it was worth $12,000 when she decided to donate it to her favorite charity. Since this is ordinary income property, she only gets to deduct the $10,000 she invested. If she held it longer than a year, she would get the $12,000 deduction. If she includes the $2,000 of short-term capital gain in her 2024 gross income, she could deduct the full $12,000 as a charitable contribution deduction.

 

Charitable Contribution Carryover

Contributions in excess of these limits will generally be carried over for the next five years until it is used up, “but not beyond that time.” There are other calculations and considerations related to the amount available to deduct in carryforward years, but the information shared up to this point should be enough background to support the theme of this article.

Example: Using the same fact pattern as the first example, Jill can take a 2018 deduction for the $5,000 ($55,000 cash donation minus $50,000 which is the 50% limit of $100,000 AGI) charitable contribution she couldn't deduct in 2017.

 

Pease Limitation

The Pease Limitation was temporarily suspended for tax years 2018-2025 thanks to the TCJA, but unless the legislation’s cuts are extended, it is coming back in full force in 2026. The Pease Limitation is a limit on certain itemized deductions for high earners. Charitable contributions, mortgage interest, state and local taxes, and certain miscellaneous itemized deductions are impacted by the Pease Limitation. These deductions are reduced by the lesser of 3% of the amount of AGI above certain income thresholds or 80% of the total itemized deductions.

Since the 2026 thresholds have not been released, the example below uses the 2017 threshold of $261,500 for single filers. The threshold for Married Filing Jointly taxpayers is $313,800. If the 2026 thresholds end up being inflated, then the limitation would be less, but a reduction would be the result in this example, nonetheless.

Example: Jill now has her own clinic, and her AGI is $500,000. She decides to make her annual $50,000 donation in 2026. She has no other deductions. Since she is a single taxpayer earning more than $261,000, her charitable contribution deduction will be reduced by $7,155, which is the lesser of $40,000 (80% of her itemized deductions) or 3% of her $500,000 AGI minus the statutory limit of $261,500.

More information here:

In Praise of Giving

 

Case Study

John and Jane Doctor are married, and both happen to be doctors. They file jointly with an AGI of $500,000. They hold many local charities close to their hearts, and they have decided on a goal of donating 10% of their AGI to various charities every year for the time being. They have a small portfolio of index funds with substantial gains that they started a few years ago. They also have some cash saved up.

They typically donate cash to various national and local charities, and after reading some WCI articles, they realize they should take a deeper look at their planned giving. So, they decide to meet with a financial and tax planner.

The planners point out to them that they can deduct the entire charitable contribution for 2024 and 2025, but their deduction would be reduced starting in 2026 due to the return of the Pease Limitation (unless it's extended).

The planners also point out to John and Jane that they could use some of their appreciated assets instead of cash. They tell John and Jane that they would avoid paying capital gains on the assets and that they could repurchase the same investments with their cash which would essentially “reset” their cost basis. Since their annual contribution is only 10% of their AGI, they’d get the full deduction in 2024 and 2025 because it is less than the 30% AGI limit of capital gain property. Much like the cash donations, though, the noncash donation would be reduced by the Pease Limitation in 2026 and beyond.

Being avid readers of the WCI blog, the planners recommend the Doctors consider “bunching” their charitable contributions into 2024. Since the cash contribution AGI limit is 60%, the planners recommend John and Jane contribute $300,000 (60%) of their AGI. It also represents six years of charitable contributions.

John and Jane are hesitant, though. They vary the annual amount and recipients of their charitable contributions, and they feel like they couldn't do that if they gave a lump sum in 2024.

Luckily, the planners read this WCI article and recommended they utilize a Donor Advised Fund (DAF), which would allow them to bunch their charitable contributions into one year and receive an immediate deduction. Then, they can recommend grants to qualified charities from their DAF over time.

There is only one nagging concern left for the Doctors. They do not want to consider donating noncash assets because they could not deduct the entire contribution in 2024 due to the AGI limit. While this is true, the planners point out that, at their income and giving level, they could carry forward to future tax years the $150,000 that cannot be deducted in 2024. Barring any additional charitable contributions in 2025 or any changes in income, they could deduct the full amount carried forward.

If, however, they wait until 2025 to donate $300,000 of capital gain property to a DAF, the carryforward contributions will potentially be subject to the Pease Limitation starting in 2026. Therefore, they would get less of a charitable contribution deduction than making the full donation in 2024 using the numbers in this example.

 

The Bottom Line

Every situation is different. While tempting to use a mental heuristic to make a decision, every taxpayer’s situation including financials, goals, and tax returns should be reviewed to determine the best approach.

Do you think the TCJA will be extended? What will you do with your charitable contributions if it's not?

[EDITOR'S NOTE: James Enriquez is a partner of Strategic Insights Financial Planning Group. He holds a Master of Science in Personal Financial Planning and a Master of Science in Taxation. He also holds the Enrolled Agent and CFP designations. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]

 

Disclosure: Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. LPL Tracking # 583318 – 02