Top Five Planning Ideas for “Mid-Range” Donors Post-“The Tax Cuts and Jobs Act of 2017”

Published: January 19th, 2018

Category: Uncategorized

Tax ReformThe “Tax Cuts and Jobs Act of 2017” (TCJA) is the most sweeping tax legislation since the Tax Reform Act of 1986. Consequent changes to the tax code have created a “new normal” for gift planners and professional advisors, who use the new law to find the best charitable planning opportunities for their donors and clients respectively. One common concern surrounding the TCJA is the adverse effect it will have on charitable giving. More pointedly, its provisions that reduce or eliminate tax incentives to make charitable gifts to public and private charities threaten to severely curtail charitable donations in the coming years.

The GOP specifically proposed doubling the standard deductions to $12,000 and $24,000 for married couples while eliminating many itemized deductions including mortgage interest, state and local taxes (SALT), and other miscellaneous itemized deductions. Republicans maintained that the proposed reform would keep itemized charitable deductions. However, the proposals to eliminate the other itemized deductions would make the preservation of the charitable deduction a moot point, as many households’ annual charitable contributions do not exceed the doubled standard deduction.

Fortunately, the final law preserved the “big three” itemized deductions: mortgage interest ($750,000 cap), state and local taxes ($10,000 cap), and charitable deductions while nearly doubling the standard deduction. Retaining the SALT deductions benefited many taxpayers who will likely continue to itemize deductions, even with a $10,000 ceiling. Prior to 2018, some 80 percent of donors itemized their charitable contributions, demonstrating that this benefit incentivizes donors to make gifts.

The following figure identifies six general categories of donors that currently exist. The blue categories featured on the left-hand side of the diagram include groups most significantly impacted by the TCJA.

First, a quick review of the donors identified on the right side of the diagram illustrates why these donors are likely less affected by the TCJA. Many annual donors who historically give less than $2,000/year presumably never itemized before the TCJA, so it is unlikely that their giving will be affected by the new laws. Additionally, major gift donors (greater than $20,000 per year) will likely continue to itemize their deductions, so they are also projected to give at historic levels in the coming years.

The donor categories that require more skillful planning under the TCJA are “tweeners” (i.e., between the annual donor and major gift donors and identified in blue), people who give between $2,000-$20,000 per year to charitable organizations.

The following planned giving strategies may incentivize these “leadership annual giving” and “mid-range” donors to continue to engage in charitable planning for tax purposes in 2018 and subsequent years under the TCJA.

Planning idea #1: Calculate Amount Necessary to Itemize and “Bundle” Gifts

Sit down with donors and provide a simple formula to calculate the charitable gifts they need to make annually in order to reach the itemized number for the year. The general formula is simple:

New standard deductionmortgage interestthe lesser of state and local taxes or $10,000 = dollar value of annual charitable gifts to justify itemizing.

For example, in 2018 Ray and Diane Smith have $8,000 in mortgage interest, pay $7,000 in property taxes and $5,000 in state income tax, and typically donate $10,000 per year to charity.

$24,000-$8,000-$10,000=$6,000. Thus, donating $6,000 or more would justify itemizing.

In the above case, Ray and Diane still benefit from itemizing their annual charitable contributions, but what if Ray and Diane retire in January 2019, move to Florida, downsize their home with no mortgage, and owe property taxes of only $5,000?

$24,000- no mortgage interest, no state income tax, and $5,000 property tax= $19,000. In this case, Ray and Diane would have to donate $19,000 or more to justify itemizing.

This second example illustrates the scenario charitable organizations are most concerned with: donors who are in the “gifting phase” of their lives during retirement, have limited mortgage and/or other SALT deductions, and may not be able to make large enough annual charitable gifts to benefit from itemizing their deductions.

In 2018, Ray and Diane’s CPA and CFP recommend a technique called “charitable bundling.”  Charitable bundling involves grouping charitable contributions into one taxable year so the total charitable contribution justifies itemizing. This strategy can be done through large outright gifts to charitable institutions or through donor advised funds (DAFs).

In 2018, Ray and Diane are still working with an adjusted gross income (AGI) of $250,000.  Under the new TCJA tax law, donors may make cash gifts up to 60% of their adjusted gross income (previously 50%). However, because they are retiring soon, they are not giving 60% of their adjusted gross income. Instead, they transfer $75,000 in cash to a DAF, which, in addition to the $10,000 they give annually, ensures that they can itemize their deductions in 2018. This plan will save Ray and Diane a considerable amount of money in income taxes.

As retired Floridians, Ray and Diane enjoy continuing grants of $10,000 per year to charities from their DAF (which grows over time), while using the new higher standard deduction of $24,000.  They are no longer worried about itemizing in order to benefit from their charitable giving each year until they once again need to “bundle” to replenish their DAF.

Planning idea #2: Make Charitable Gifts to Avoid Gains-Part 1

In 1978, Ray and Diane purchased a home in the Northeast for $200,000. By 2018, they had paid off their mortgage and listed the home for $1.1 million. While they qualify to exclude the first $500,000 in gains from the sale of their primary residence[1], they will still have a capital gain of $400,000 ($1.1m-$200k basis, less $500K exclusion under IRC § 121=$400k gain).

Realizing they could owe as much as 23.8% of the gain to federal taxes on top of a 5% state tax on capital gains, Ray and Diane donate 1/8 of an undivided interest in their home to their local Community Foundation in March of 2018 before they list the property. This means they have only marginally reduced their basis to $175,000 but tactically reduced the capital gain to $287,500 ($962,500 7/8 home value-$175,000 basis-$500,000=$287,500). This transaction not only reduces Ray and Diane’s federal capital gain from 23.8% to 18.8%, but they also earned an itemized deduction of $137,500 for making the gift. This deduction will offset much of the remaining capital gains tax.

Ray and Diane’s financial advisor is concerned this plan will not work. Under tax code 170, a donor may only deduct 30% of their AGI. In Ray and Diane’s case, 30% would only amount to $75,000 ($250,000 AGI x .30). Fortunately, Ray and Diane can carryforward their unused deductions into five more tax years. This makes their new AGI $120,000 in 2019 and $150,000 in 2020. Ray and Diane are thus able to itemize and use all their remaining deductions from their gift in 2018.

Their home sold in November of 2018. After closing costs, the Community Foundation has $128,000 in Ray and Diane’s donor advised fund, and they can make considerable grants to charities in the upcoming years without worrying about itemizing their deductions.

This transaction isn’t for the faint of heart and works most optimally in Ray and Diane’s case only if their home sells the same year which they made the gift. This stipulation explains why Ray and Diane donated it early in the year.

Planning tip: Under the new TCJA laws, it is important to recognize that households may be paying a federal capital gains tax rate at the same rate or even higher than their ordinary income in years where they have significant long-term capital gains.

Planning idea #3: Make Charitable Gifts to Avoid Gains-Part 2

It is 2018, and Ray and Diane would like to make a significant charitable gift this year since they believe they will have to use the standard deduction in future years. However, they don’t want to go through the process of gifting 1/8 of their home. Instead, they would rather make a significant gift by transferring some appreciated stock to their alma mater to establish a $100,000 gift.

When donors gift appreciated stock, they avoid being taxed on the long-term gain. Additionally, they can deduct the full value of the stock.  Unfortunately, the deduction is limited to 30% of the donor’s AGI, as opposed to 60% of the donor’s AGI for a gift of cash. This concerns Ray and Diane since they might only be able to deduct $75,000 of the $100,000 in 2018. Ray and Diane can carry forward the $25,000 deduction that remains in 2019. Yet while the carryforward is useful, Ray and Diane were hoping to get a larger deduction in 2018. Fortunately, the gift planner at Ray and Diane’s University identified that there may be an opportunity to secure that larger deduction by using an often overlooked provision of Section 170.

In this example, Ray and Diane’s basis in the stock they gifted was $88,000. Instead of deducting $100,000 (limited to the 30% rule), they skip the gain and just deduct their basis of $88,000 (limited up to 60% AGI).[2]  This strategy allows Ray and Diane to deduct the entire gift in 2018. Because their income is expected to decrease in 2019, deducting the entire gift in 2018 saves Ray and Diane a considerable amount of money.

Planning tip: If the special 30% limitation affects the taxpayer’s deduction but the capital gain property contributed has only a small amount of unrealized gain, the taxpayer would probably benefit from electing to deduct basis instead of FMV. This might allow the taxpayer to deduct the full basis in the contribution year rather than taking a slightly larger deduction in a subsequent tax year. If the basis of the gifted asset is 50% or higher to the FMV, the donor may actually want to use the basis for their deduction instead of the FMV.

Notably, this increase to 60% will not only make it easier for those who make substantial charitable contributions to claim a full deduction, but it may also help to “release” the existing carryforward deductions for those who previously made substantial gifts.

Long Term Capital Gains & Qualified Dividend Rates Current vs TCJA

Planning idea #4: Qualified Charitable Distribution AKA “Charitable IRA Rollover”

Instead, assume that Ray and Diane did not want to make major gifts in 2018 or 2019 since they were nervous about their upcoming retirement. It turns out the annual income from their investments and social security income are just enough to cover their budget in Florida.  In 2020, Ray turns 70 ½ and expects their income to increase by $40,000 per year because he now has to take a required minimum distribution (RMD) from his IRA. However, they do not need the RMD income for their current budget.

On December 18, 2015, the IRA Charitable Rollover was passed by Congress and signed into permanent law. This law allows taxpayers age 70 ½ or older to transfer up to $100,000 annually from their IRA accounts directly to charity without first having to recognize the distribution as income.[3] Further, the qualified charitable distribution satisfies the required minimum distribution requirements.[4]

This is finally the opportunity that Ray and Diane have been waiting for. Ray’s IRA custodian can transfer $10,000 per year to charities they support without having to report the income. This method is more efficient than trying to deduct the gifts in the first place. Note that Ray and Diane only transfer $10,000 per year to charity using Ray’s IRA rather than trying to “bundle” gifts to a donor advised fund because charitable IRA rollover distributions may only be used for qualified public charities and cannot go to a donor-advised fund, supporting organization, or private foundation.

Ray and Diane are asked to commit to a multi-year pledge for their church capital campaign, and they plan to do so with contributions through the charitable IRA rollover. [5] This strategy will reduce their taxable income by transferring part of Ray’s RMD to charity each year, while maintaining the couple’s annual use of the standard deduction.

Planning idea #5:  Charitable Bequest Using Taxable Assets in Estate Plan

Many individuals and couples determine that part of the legacy they would like to leave behind is one final bequest to charities through their estate. Historically, leaving a bequest to charity prevented an estate from owing a significant amount of estate taxes. Not long ago, very complex planning was involved to mitigate federal estate taxes. However, those days are long gone. This shift can be attributed to the fact that exemptions were $1,000,000 just fifteen years ago, which is comparatively much lower than they are today.[6]

The TCJA of 2017 doubles the base federal estate and gift tax exemption amount from $5 million to $10 million per person.[7] The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple). Note that several states have a much lower estate tax exemption than the federal exemption, and the federal portability rule does not apply to their state’s estate transfer tax.[8] This means that donors with smaller estates may still benefit from a bequest to charity in order to mitigate estate taxes from their state of residence.

With the exception of families with $22.4 million or greater in wealth, there is no longer a threat for the estate tax. However, many estates will either pay income tax on certain assets or transfer those assets to their loved ones who will pay income taxes. In the tax world, this is known as “income in respect of a decent” or (IRD).

IRD includes income earned or accrued during life but not received until after death. According to the Sec. 691 regulations and commentary, IRD has four characteristics:

  1. The income would have been taxable to the decedent if the decedent had survived to receive the income
  2. The income right had not matured sufficiently to have been adequately included in the decedent’s final income tax return
  3. The income isn’t a capital asset[9].  A capital asset typically receives a “stepped-up” basis at the owner’s death, however IRD does not receive a step-up in basis since the income has yet to be taxed on the decedent’s income tax return.
  4. If the IRD is payable to someone directly other than the estate, the beneficiary must have acquired the property right because of the decedent’s death.

The most frequently received items of IRD are compensation income, commissions, retirement assets, partnership distributions, and payments for harvested crops.

Under Sec. 691(a), IRD must be included in gross income by the estate or other person who acquires the right to receive the income for the tax year when received.

When a governing instrument identifies a source of income (such as IRD) to be used for a charitable income tax deduction, the instructions must have an “economic effect” independent of income tax results in order to be accepted. [10] After all the non-charitable beneficiaries have been paid in full, and the only beneficiaries remaining are charities, the Service has allowed estates to claim a charitable income tax deduction to offset taxable IRD income to the estate.[11]

An estate using IRD assets to satisfy a charitable bequest will obtain the largest income tax advantages when it qualifies for an income tax charitable deduction.[12] Since a donor might not know at the time their will is drafted whether or not their estate will eventually have IRD, it can be effective to include instructions in their last will that charitable bequests shall be made using IRD assets.

An estate will typically recognize taxable income if the fiduciary uses savings bonds or other appreciated property of the estate to satisfy a specific pecuniary bequest, including a charitable bequest.[13]  An exception can apply if the will or local law gives the fiduciary the power to make non-pro rata distributions, but the fiduciary’s decision to make a non-pro rata distribution of IRD assets generally triggers income to the estate.[14]

Unless the will contains instructions that charitable contributions be paid with the estate’s income, there will be no offsetting charitable income tax deduction.[15]  To satisfy the income tax requirement that a trust’s or estate’s gifts be made with the entity’s income, the last will or trust could have a clause such as the following: “I instruct that all my charitable gifts shall be made, to the extent possible, from property that constitutes ‘income in respect of a decedent’ as that term is defined in The Internal Revenue Code.” This clause might allow the estate to claim an estate tax and an income tax charitable deduction using IRD assets. While there is little guidance regarding IRD assets as charitable bequest, it is clear that in the absence of such a clause, the estate cannot claim a charitable income tax deduction.

Charitable Planning for “leadership annual giving” and “mid-range” donors after TCJA

The TCJA has reduced or eliminated tax incentives that inspire some donors to make charitable gifts. The law most directly impacts “leadership annual giving” and “mid-range” and” donors who give up to $20,000 per year. However, the strategies identified above mitigate the law’s negative effects by providing new tax incentives for these donors. Donors, gift planners, and advisors should consider these strategies in light of the new charitable planning landscape created by the TCJA.

[1] Under IRC section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers).

[2]Donors willing to limit their deduction to the tax basis of the property can elect to use the 50% limitation rather than the special 30% limitation for capital gain property contributed to a 50% charity (Sec. 170(b)(1)(C)(iii)). The election, once made, is irrevocable (Woodbury, 900 F.2d 1457 (10th Cir. 1990)). It applies to all gifts that would otherwise fall under the special 30% limitation for that year, including carryovers subject to the special 30% limitation.

[3] See IRC §408(d)(8)(B)

[4] See IRC Section 408(d)(8)(b)

[5] See Rev. Rul. 64-240, a taxpayer who satisfies a pledge by making a qualified charitable distribution under IRC §408(d)(8) from his or her IRA directly to a charitable organization would not include the distribution in gross income, the IRS said in a August 20, 2010 Information Letter to Harvey P. Dale, University Professor of Philanthropy and the Law, Director, National Center on Philanthropy and the Law at New York University Law School written by Michael J. Montemurro, Office of Associate Chief Counsel.

[6] In 2002 the federal exemption was just $1,000,000 with no portability to surviving spouse and wealth beyond that was taxed at 55%

[7]See IRC 2010(c)(3), and amended by TCJA Sec. 11061(a))

[8] 17 jurisdictions impose either an estate or inheritance tax. Those 17 jurisdictions are Connecticut, the District of Columbia, Hawaii, Illinois, Iowa (inheritance tax only), Kentucky (inheritance tax only), Maine, Maryland, Massachusetts, Minnesota, Nebraska (county inheritance tax only), New Jersey (inheritance tax only), New York, Oregon, Rhode Island, Vermont, and Washington.

[9] As described in Sec. 1014(a) that would receive a step up in basis

[10]  See Reg. 1.642(c)-3(b)(2)

[11] See Private Letter Rulings 200826028 (Mar. 27, 2008), 200526010 (Mar. 22, 2005), 200336030 (June 3, 2003), and 200221011 (Feb. 12, 2002) (IRAs and savings bonds); also 200537019 (May 25, 2005) (annuity contracts)

[12] The charitable deduction under IRC § 642(c) for estates relates specifically to the income tax deduction for amounts paid out of taxable income of the estate for charitable purposes. This deduction is reflected on the income tax return of the estate, Form 1041 (U.S. Fiduciary Income Tax Return). That is separate from the estate tax charitable deduction available under IRC § 2055 for transfers to charity on death

[13] Reg. Sec. 1.661(a)-2(f)(1); Keenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940)

[14] See PLR 9537011 (June 16, 1995)

[15] See Private Letter Ruling 9507008 (Nov. 10, 1994) concerning a distribution of savings bonds to a charity

Paul Caspersen, CFP®, MS

Paul Caspersen, CFP®, MS

Assistant Vice President and Senior Philanthropic Advisor at University of Florida Office of Gift Planning
Paul Caspersen is the Assistant Vice President and Senior Philanthropic Advisor at the University of Florida’s Office of Gift Planning. You can email him at or call (352) 392-5513
Paul Caspersen, CFP®, MS
Alex Cobb, JD, LLM
Alex Cobb, JD, LLM is the Executive Director at the University of Florida’s Office of Gift Planning. You can email him at or call (352) 392-9532
Alex Cobb, JD, LLM

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