New Tax Law: FAQ

Stelter’s Senior Technical Consultant, Lynn Gaumer, J.D., is back with another blog on tax law. This time, she is here to answer all of your burning questions regarding the new tax law. (If you missed it, here is her initial blog on the charitable giving implications of the new tax law.) In her six years with Stelter, Lynn has been devoted to remaining up-to-the-minute on tax legislation, research and trends that could affect your planned giving program.

Q. Our acknowledgement letter includes the following language: ABC Charity “is a 501(c)(3) nonprofit organization. Your contribution is tax deductible to the extent allowed by law. No goods or services were provided in exchange for your contribution.” Is this wording still valid for inclusion given the new law?

A. Nothing has changed in the required language. The new tax law maintains charitable contributions as an itemized deduction, but nearly doubles the standard deduction and disallows certain other itemized deductions. As a result, fewer taxpayers will itemize. Despite the changes, I recommend keeping your current language under the new tax law. Your organization has no way of knowing who will itemize deductions. In addition, some states may allow charitable deductions.

 Q. Do you find that nonprofits are considering establishing their own donor advised funds? Is that even possible?

 A. With the surging popularity of donor advised funds, I believe some larger nonprofits are evaluating whether they should establish their own. It is possible. Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) sponsoring organization (other than a private foundation). The sponsoring organization may be a community foundation, public charity or a charitable fund associated with an investment firm. I recommend connecting with your board to determine if it is the right fit for your organization. Unless administering donor advised funds is part of the organization’s mission, as is the case with many community foundations, an organization considering establishing a donor advised fund might also consider requiring that a portion of the fund be distributed to the sponsoring organization, either currently or ultimately.

Q. The estate tax exemption increased from $5.49 million to approximately $11.18 million for individuals and $10.98 million to approximately $22.36 million for married couples. An estimated .1 percent of taxpayers will now be subject to estate tax. Doesn’t the fact that the estate tax will apply to far fewer people mean fewer planned gifts, rather than accelerate current giving?

A. Not necessarily. I recently heard from an estate planning attorney who met with a client to review the changes in tax law. Under prior law, she was subject to estate tax. Under the new law, the client is not subject to estate tax. The generous donor decided to update her will to include a larger gift to the charitable organization. I also believe the increased exemption will accelerate some testamentary gifts into lifetime gifts. A donor who no longer needs an estate tax charitable deduction may wish to make a gift now and not only take an income tax charitable deduction but also witness the impact of the gift. In addition, charitable remainder trusts and gift annuities may enable a donor to diversify assets on a tax-free basis and increase income by selling low-basis, low-yielding securities.

Q. Can you please review when an IRA makes a great planned gift?

A. Under the new tax laws, gifts from individual retirement accounts (IRAs) made my top gifts to make in 2018 list as distributions from these accounts will be taxed at the recipient’s ordinary income tax rate. This rate can be as high as 37 percent.

Donors age 70½ or older can use the IRA charitable rollover to make a tax-free gift to a qualified charitable organization. The law allows an IRA account owner to transfer a total of $100,000 directly to one or more qualified charitable organizations. The donor pays no income taxes on the gift. The transfer doesn’t generate taxable income or a tax deduction, so the donor benefits even if he or she does not itemize tax deductions, and the donor can still take the much-increased standard deduction. If your donor has not yet taken the required minimum distribution for the year, the IRA charitable rollover gift can satisfy all or part of that requirement.

Donors of any age can still support your organization with an IRA by simply naming your organization as a death beneficiary of all or part of the IRA account. This arrangement is one of the most tax-smart ways to support a charitable organization after the donor’s lifetime. If the donor names loved ones as the beneficiaries of the retirement plans, federal income taxes alone can erode up to 37 percent of the amount they receive from the plan. In contrast, as a nonprofit organization, you bypass any taxes and receive the full amount.

Q. Is the 60 percent limit on cash gifts a percentage of AGI or total income?

A. The act increases the adjusted gross income limitation (computed without regard to any operating loss carryback) for individual donors’ cash contributions to public charities and private operating foundations (and a few other special charities) from 50 percent to 60 percent. This means that an individual donor may now deduct cash contributions to public charities, including donor advised funds, up to 60 percent of the donor’s adjusted gross income.

Q. Can you address the sunset aspect of the new tax law? Do the estate tax provisions sunset?

A. The majority of individual income tax changes in the Tax Cuts and Jobs Act are temporary, expiring absent extension on Dec. 31, 2025. Some of the most impactful provisions scheduled to expire include the reduction of individual income tax rates, increased child tax credit, the increased standard deduction and the increased estate tax exemption. Congress will need to act or the rules will revert to prior law after Dec. 31, 2025.

Q. Does the 1.4 percent excise tax affect only private institutions? Does it apply to private secondary schools?

A. The 1.4 percent excise tax only applies to investment income of private colleges and universities, not secondary schools. Under the new law, the private college or university is subject to the tax only if it has at least 500 full-time tuition-paying students, at least 50 percent of whom reside in the United States, and endowment assets that exceed $500,000 per full-time student.

Q. Does the 21 percent excise tax on compensation in excess of $1 million apply to public universities or private secondary schools? Is it based on that person’s annual salary?

A. Although Congress attempted to apply the 21 percent excise tax to most tax-exempt organizations–including public universities and private secondary schools–there is some question whether the legislation as drafted applies to public universities. There may also be constitutional limitations on the ability of the federal government to tax state institutions. But for the institutions that are covered, all compensation subject to federal income tax withholding is counted for purposes of the excise tax. Also included are any amounts subject to taxation under Code section 457(f) (which applies to certain deferred compensation arrangements of covered tax-exempt entities). However, compensation does not include any Roth contributions made by the employee under the employer’s 401(k) or 403(b) plan.

Any other questions?

Just ask us! Or watch Lynn’s webinar with Larry Katzenstein, partner at Thompson Coburn LLP and authority on estate planning and planned giving, on the new tax law and what it means for your nonprofit and your donors.


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