By Rhonda G. Williams, CPA
Barraclough & Associates, P.C.
Certified Public Accountants & Consultants
Tax Cuts and Jobs Act, Part II
The last newsletter covered the tax law’s effect on nonprofit organizations that had unrelated business income. This quarter’s newsletter takes a look at contributions, the lifeblood of most 501(c)(3) organizations.
The tax law giveth and the tax law taketh away. The new law affected charitable contributions in two big ways:
(1) The limitation for cash contributions by individuals to public charities and private operating foundations was increased from 50% of adjusted gross income (AGI) to 60% of adjusted gross income. For those individuals whose deduction was often limited, this was a welcome change. However,
(2) Since the standard deduction was almost doubled, many individuals who itemized their deductions in the past may no longer find it beneficial to do so. While some taxpayers will continue to make contributions to charity, some may scale back when they no longer “need” the tax deduction.
One tax-planning method is the bunching of itemized deductions. Taxpayers whose itemized deductions are less than the standard deduction may be able to exceed it if they shift some of their itemized deductions from one year to another. For example, an individual who gives $10,000 a year to charity and has total itemized deductions below the standard deduction may be able to itemize if donations are $20,000. However, he/she may not be financially able to donate $20,000 a year. By donating $20,000 one year and skipping the next, the taxpayer can donate the same amount of money over the two-year period while retaining the tax deduction. In the off years, the taxpayer can claim the standard deduction. This method may make it more difficult for charities to plan their yearly budgets, but at least they will not lose the income altogether.
The QCD (qualified charitable distribution) rules have not changed, but they are complicated. An individual who makes a direct rollover from an IRA to a qualified charity has a tax benefit to the extent that the reduction in the AGI affects his/her tax bracket and any calculations that are dependent on the AGI. A QCD can be made ONLY to a public charity or private operating foundation. A rollover to a private foundation, supporting organization, or donor advised fund is not a QCD. Also, the QCD must be a direct rollover. If the funds pass through the taxpayer’s hands, the contribution is not a QCD. Finally, the donor acknowledgment letter must state that the contribution was a qualified charitable distribution from the taxpayer’s IRA.
Charities need to be familiar with the tax laws so that they do not make mistakes that harm their donors or lead to the loss of donors and, therefore, income.