An Option to Maximize Tax Savings from Charitable Contributions if the Tax Act is Passed

John J. FureyDecember 8, 2017


A client asked the following: “I heard that charitable contributions may not result in any tax savings if the proposed Tax Cuts and Jobs Act is passed. Is there anything that I can do to realize the tax savings from my future charitable contributions?”

Proposed New Standard Deduction

  • The reason that the Tax Cuts and Jobs Act (the Tax Act) will likely result in the elimination of tax savings from charitable contributions is the significant increase in the Standard Deduction. The House version of the Tax Act increases the Standard Deduction to $24,400 for joint filers and the Senate version increases it to $24,000. The final amount of the Standard Deduction will be decided in a “conference committee” between the House and Senate. The final Tax Act is expected to be effective January 1, 2018.
  • The Standard Deduction for 2017 is $12,700 for joint filers. It is estimated that only about 10% of taxpayers will elect to itemize their deductions after 2017 because of the proposed significant increase in the Standard Deduction. Under current tax rules about 30% of taxpayers itemize their deductions.

Proposed Limits on Itemized Deductions 

  • In 2017, if your other Itemized Deductions, such as state income or sales taxes, real estate taxes and mortgage interest, equal or exceed $12,700 and you make charitable contributions of $10,000 you generally receive the full tax savings related to the contributions. If you are in the 25% marginal tax bracket your tax savings would be $2,500 from $10,000 in contributions.
  • Both versions of the Tax Act eliminate the deduction for state income or sales taxes and cap the real estate tax deduction at $10,000. The House version of the Act limits the mortgage interest deduction to only the interest on $500,000 of mortgage debt on a primary residence. The Senate version leaves the current rules in effect for taking the mortgage interest deduction. Both versions eliminate the deduction for interest on home equity debt.

Best Option to Maximize Tax Savings from Charitable Contributions – Must Act by 12/31/17

  • Given the proposed elimination or limits on the most common Itemized Deductions, it is likely that you will take the Standard Deduction beginning in 2018. If you do, the tax savings from annual charitable contributions of $10,000 will likely be zero in 2018 and future years.
  • An option to realize the tax savings for future charitable contributions is to contribute highly appreciated securities to a donor advised fund no later than December 31, 2017. If you do so, you can take a charitable deduction in 2017, based on the fair market value of the securities on the date of the contribution. You are prefunding your normal charitable contributions for future years. You can take the charitable deduction in 2017 for this prefunding.

An Example of the Potential Tax Savings

  • If in 2017 you contribute to a donor advised fund securities with a fair market value of $30,000 that you purchased for $5,000, you get a charitable deduction of $30,000 in 2017. If your Adjusted Gross Income (AGI) exceeds $100,000 and you are in the 25% marginal tax bracket, your tax savings is $7,500 from the contribution. Charitable donations of appreciated securities cannot exceed 30% of your AGI.
  • In addition to the tax savings from the contribution, you will have avoided the capital gains tax of $3,750 (15% x $25,000) on the long-term gain in the securities.
  • Your total tax savings is $11,250 for prefunding your charitable contributions for the next 3 years. Under a donor advised fund you control what charities receive a donation and when they receive it.
  • If, after the Tax Act is passed, you use the Standard Deduction to calculate your taxes and you make $10,000 in charitable contributions in each of 2018, 2019 and 2020, your tax savings from the contributions will be zero.

Information about Donor Advised Funds

If you have any questions about donor advised funds or other tax issues, please do not hesitate to contact our office (610-651-2777). We can assist you in establishing a Schwab Donor Advised Fund.