Q. I give to charities every year during the holiday season. However, I’m concerned about the ramifications of doing so this year with the new tax law. Can I give as I usually do and take tax deductions, or is there something different I should know?
Also, my husband, John, is 80 years old and has several health ailments, including high blood pressure, diabetes, and mild cognitive impairment. If his health suddenly declines and if he requires nursing home care in the next several years and we would like to qualify for Medicaid, would he be penalized for the charitable gifts that we give?
We also give small gifts to the humane society every month. Would we be penalized for these gifts, even though we’ve been making them for years?
A. As the year is coming to an end, many people plan to give to charitable organizations. However, as you mentioned, the tax benefit of those contributions could be impacted by the recently passed Tax Cuts and Jobs Act (TCJA).
The TCJA has unintended consequences for charitable giving, and this will surely impact the number of people giving to charities. According to the Tax Policy Center, the TCJA will prevent 21 million Americans from taking a charitable deduction. Among middle-income households, the share of taxpayers claiming charitable deductions will drop from 17% to 5.5%. But, there are ways to continue to give to charities and maximize tax deductions, as I will describe later in the article.
Itemizing Tax Deductions vs. Standard Deductions
Under the new tax law, many people who have previously itemized deductions on their taxes will now be taking the standard deduction. Why does this matter? Charitable contributions are only tax deductible for you if you itemize.
All taxpayers get an initial chunk of their income tax-free. You can choose to either take the standard deduction or you can itemize your deductions. The standard deduction is a fixed amount, while itemizing is variable and based on whether you have large itemizable deductions or not; the biggest three are typically mortgage interest, state and local taxes, and charitable contributions.
When Would You Choose to Itemize?
If your itemized deductions are greater than the standard deduction amount of $12,000 for an individual and $24,000 for a married couple, then it might be a wise idea to itemize. In other words, if you pay more in combined mortgage interest, state and local taxes, and charitable contributions than the standard deduction amount — then itemizing your deductions will usually result in a larger tax-free amount of income.
Here are some considerations:
• The standard deduction of $24,000 for a married couple and $12,000 for an individual is up from $12,700 and $6,350 last year, respectively. The nearly doubled standard deduction means that many taxpayers who are used to itemizing deductions will take the standard deduction going forward, because their itemized deductions would have to be almost twice as high now for itemizing to make sense.
• The personal exemption, which was $4,050 for each member of your household last year, has been eliminated across the board.
• The TCJA has a new $10,000 limit on state and local tax deductions. Under the TCJA, your maximum deduction for state and local taxes is now capped at $10,000. So, if you are married, and have $30,000 of state and local taxes, $12,000 of mortgage interest and made $1000 of charitable contributions, your itemizable deductions are now $23,000 (capped $10,000 state and local tax + $12,000 mortgage interest + $1000 charitable contribution) instead of $43,000 (full $30,000 state and local tax + $12,000 mortgage interest + $1000 charitable contribution). That’s below the new $24,000 standard deduction, so you won’t be itemizing. And because of that, your charitable contributions are no longer tax deductible for you.
• Tax rate is lower, so tax savings from a deduction are lower: Even for the households still able to itemize deductions, the value of the charitable contribution deduction has dropped, because the tax rates are lower. When tax rates go down, tax savings from a deduction are lessened. While this may not stop someone from making a donation, it may reduce the dollar amount they give, and cumulatively across the US, this will most likely reduce charitable giving.
• Increased limit for certain gifts: If you do itemize, please note that the TCJA increases the limit for cash gifts to public charities and certain private foundations from 50% to 60% of your adjusted gross income (AGI), and you can carry forward by up to five years any amount that exceeds that. Other contributions continue to be limited to 50%, 30%, or 20% of AGI, depending on the item(s) donated and the type of charitable organization.
• Like to give money to your alma mater in exchange for basketball or football tickets? The TCJA eliminates deductions for donations to colleges and universities in exchange for the right to purchase season tickets to athletic events. Previously, these donations were 80% deductible.
• Gift and Estate tax exemption doubled: The TCJA doubles the gift and estate tax exemption for deaths and gifts after December 31, 2017, and before Jan. 1, 2026. In 2018, the inflation-adjusted exemption is $11.18 million ($22.36 million for married couples). This only affects 2,000 people in the entire country.
Charitable Giving Doesn’t Need to Cease: Bunch charitable deductions
One way to boost the tax benefits of charitable giving is to “bunch” your donations into alternating years. For instance, let’s say you ordinarily donate $6,000 per year to charity. With the new tax laws, you can enjoy additional tax savings by donating $12,000 every other year instead. In this case, you can claim the standard deduction ($24,000) this year and take $29,000 in itemized deductions next year ($10,000 in state and local taxes, $7,000 in mortgage interest and $12,000 in charitable donations). This strategy generates an additional $5,000 in deductions over a two-year period.
Charitable IRA rollover: No need to itemize
If you’re age 70½ or older and plan to make charitable gifts, consider a qualified charitable distribution (QCD) from an IRA — also known as a “charitable IRA rollover.” This strategy allows you to transfer up to $100,000 per year directly from an IRA to a qualified charity, tax-free. You don’t “technically” get to claim a charitable deduction, but the funds distributed to the charity from your IRA aren’t included in your taxable income, thus providing you with the equivalent of a $100,000 charitable deduction, without the need to itemize. This is a great option for those who otherwise wouldn’t be entitled to a charitable deduction because they claim the standard deduction or because their deductions are reduced by the AGI limitations described above.
Always Remember — Gift Giving is Risky for People Who May Need Nursing Home care within 5 Years
Medicaid presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for long-term care Medicaid benefits must disclose all gifts made by the individual or his or her spouse within the prior 5 years.
If you have a history of giving small weekly or monthly gifts to a charity, most Medicaid agencies will not construe those to be disqualifying gifts. For instance, in Virginia, these types of small charitable gifts are not penalized so long as they are under $2,000 per year. And in Virginia, gifts up to $4,000 per year are not penalized so long as there was a regular pattern of making this gift for years prior to applying for Medicaid.
Does this potential risk of a Medicaid penalty suggest that all giving should cease? Not necessarily. However, those who may need nursing home care within the next five to Tennessee years must weigh the joy of giving against the potential cost of losing much-needed Medicaid benefits.
For more information about gifting and Medicaid eligibility, read “Medicaid: The Perils of Gifting FAQ” on our website. For other ways that the TCJA impacts seniors, please read our article, “With the New Tax Law and Life Changes, it’s Time to Review Your Estate Plan.”
Tax Laws and Medicaid Rules Change Frequently
With all of the frequent changes that have taken place in the tax laws, and frequent changes that occur in Medicaid rules and the interpretation of Medicaid role, I recommend that everyone should revisit their estate plans regularly, at least every three years, but ideally every year. The Farr Law Firm’s Lifetime Protection Program ensures that your documents are properly reviewed and updated as needed, so that they will have the proper effect under the law.
As always, if you or a loved one is nearing the need for personal care or already receiving personal care, or if you have not done Long-Term Care Planning, Estate Planning or Incapacity Planning (or had your Estate Planning documents reviewed in the past several years), please call us to make an appointment for an initial consultation. Please note that unfortunately, under the new tax law, you can no longer deduct 20% of your estate planning and tax planning expenses as you were able to in the past, but it is still essential to plan ahead and keep your plan up-to-date!
Estate Attorney Fairfax: 703-691-1888
Estate Attorney Fredericksburg: 540-479-1435
Estate Attorney Rockville: 301-519-8041
Estate Attorney Washington, D.C.: 202-587-2797
About Evan H Farr, CELA, CAP
