Tax Changes 2018

How The Tax Cuts and Jobs Act of 2017 Affects You

The Tax Cuts and Jobs Act of 2017 (“TCJA”) made some major changes to both corporate and individual taxes. Most of these provisions take into effect with the 2018 tax year, meaning that you will start to see the differences when you go to file your 2018 tax return early next year. The purpose of this letter is to provide some information on the changes to how you may deduct charitable gifts, both to Mount Olivet and to other organizations, so that you can consider your options before the end of the 2018 tax year.

Please note that this letter does not constitute tax advice, or the formation of an attorney-client relationship, and is for general information purposes only. Please consult your own accountant or tax advisor for advice specific to your situation

before making any decisions.

One of the controversial provisions of the TCJA was to reduce the categories and dollar amounts of itemized deductions. More than a third of taxpayers, including a majority of taxpayers in the DC area, used itemized deductions rather than the standard deduction, filing a Schedule A with their personal tax return. This allowed taxpayers to deduct items such as major medical expenses, unreimbursed employee business expenses, state and local taxes, home mortgage interest, and, importantly, charitable deductions. In 2017, the standard deduction for an individual was $6,350.00 and for a married couple filing jointly it was $12,700. Between Virginia state income taxes and Arlington County real estate and vehicle personal property taxes, and possibly home mortgage interest, many taxpayers were above this threshold, meaning that they were better off by itemizing deductions rather than using the standard deduction.

If you were taking the standard deduction, and decided to make a charitable donation, then you wouldn’t see an additional tax savings from the charitable donation. If instead you were already itemizing your deductions, because of state and local taxes, home mortgage interest, or other reasons, then any gifts to charity would give additional tax savings.

Under the TCJA, several changes have occurred, including:

1. State and Local Tax Deductions are capped at $10,000 per year, per tax return (whether single or married filing jointly). If your Virginia state taxes and Arlington County real estate and personal property taxes exceed this amount, you only get to deduct up to $10,000. 

2. The Standard Deduction has increased to $12,000 for an individual or $24,000 for married couple filing jointly. 

3. Miscellaneous itemized deductions are no longer allowed

4. Interest on a home mortgage may still be deducted, but for loans originated on December 15, 2017 or later, only interest on the first $750,000 of loans used for purchase or improvement of a home is deductible.

Because of these changes, only 3% - 4% of taxpayers will see a benefit of itemizing their deductions over taking the standard deduction.

For example:

John and Joan Smith are both 71 years old, retired, and have a home in Arlington with no mortgage. They normally give $10,000 per year to the church. They are taking required minimum distributions from their retirement accounts, generating taxable income. Because their state and local income tax deduction is capped at $10,000/year, they are better off taking the $24,000 married filing joint standard deduction if their charitable giving is less than $14,000 per year.

For regular charitable donors, one solution is to make larger gifts in some years, such that the total gifts are significant enough to warrant itemizing deductions, and then make no charitable gifts in other years. This could be accomplished a couple of different ways:

Donor Advised Funds

Most major investment firms including Fidelity, Vanguard, Charles Schwab, and TIAA-CREF, have Donor Advised Funds. In addition, community foundations such as the Arrington Community Foundation offer Donor Advised Funds. With a Donor Advised Fund, the donor can make a large donation periodically, and receive a tax deduction at the time of the donation to the Donor Advised Fund. The funds are held in a separate account for the donor, and the donor can then make recommendations (“advise”) on gifts to any 501(c)(3) charity at any point in the future.

In 2018 John and Joan Smith (from our example above) make a $80,000 contribution to a Donor Advised Fund, taking a total $90,000 deduction ($10,000 in state and local taxes and $80,000 to the Donor Advised Fund). They may also choose to donate appreciated securities, avoiding capital gains tax on the donated securities and further saving taxes.

The Donor Advised Fund invests the assets, as directed by the Smiths. The Smiths set up a recurring gift, directing the Donor Advised Fund to send $10,000 per year to Mount Olivet. The Smiths can also make additional gifts to other 501(c)(3) charities, either single gifts or recurring gifts. 

In 2019 - 2022 the Smiths do not make any charitable donations, but take the standard deduction of $24,000 per year.

Periodic Gifts to Mount Olivet

To assist congregation members in maximizing the tax savings from their charitable deductions, Mount Olivet will accept larger gifts in one year, and allow the church member to designate that the gift be invested and spread out over two or more tax years.

In 2018 John and Joan Smith (from our example above) make a $50,000 “5 Year” gift to Mount Olivet and itemize their deductions, taking a total $60,000 deduction ($10,000 in state and local taxes and $50,000 to the church). They may also choose to donate appreciated securities, avoiding capital gains tax on the donated securities and further saving taxes.

Mount Olivet invests the $50,000 with Enduring Gifts, withdrawing $10,000 per year, plus any investment returns, each year for 5 years, to use for the Operating Fund.

In 2019 - 2022 the Smiths do not make any charitable donations, but take the standard deduction of $24,000 per year.

If you are interested in making such a gift, simply send your donation to the church and designate the number of years you would like it to be spread across. Feel free to contact Marilyn Traynham in the church office for further assistance.

Gifts from Taxable Individual Retirement Accounts (IRAS)

For taxpayers who are at least 70½ years old, a final option is to make a gift of up to $100,000 per tax year directly from a taxable individual retirement account (IRA) to public charity. This can be done in addition to taking a Required Minimum Distribution (RMD), or can be used to satisfy part or the entire RMD requirement. The advantage of this direct gift is that the income is never reported to the taxpayer, and no deduction needs to be taken, meaning that every dollar donated is tax free.

In 2018 John Smith is required to take a $25,000 Required Minimum Distribution (RMD) from his IRA. If he takes that $25,000 RMD, he will recognize $25,000 in taxable income. If he then donates $10,000 to Mount Olivet, he and Joan will not see a tax benefit, because they will still be under the threshold for itemizing deductions.

Instead of taking the full $25,000 RMD personally, John directs his IRA administrator to send $15,000 to John and $10,000 to Mount Olivet. John only recognizes $15,000 in taxable income, and doesn’t need to itemize deductions.

Perpetual Gifts to Mount Olivet

While the Enduring Gifts Fund often receives gifts after the death of a congregation member, from their Trust or Estate, a perpetual gift can also be established during the congregant’s lifetime, and can be designated for support of the Operating Fund.

In 2018, the Smiths decide to make a perpetual gift to the Enduring Gifts Fund to fund their $10,000 annual pledge indefinitely. The Smiths make a $200,000 gift, with a combination of: (a) cash; (b) appreciated securities, avoiding capital gains on the sale of the securities; and/or (c) a distribution of up to $100,000 from their IRAs. 

Mount Olivet invests their $200,000 in the Enduring Gifts Fund, generating $10,000 per year forever.

We're Ready to Help

However you choose to support Mount Olivet, the Enduring Gifts Fund and Marilyn Traynham, our church administrator, are ready to assist you and your advisors so that you can maximize your gift as you support the worship and missions of Mount Olivet.

In addition to supporting the Operating Fund, gifts of $10,000 or more to Enduring Gifts may be designated for a specific purpose, including the Capital Fund and Community Assistance. Feel free to reach out to us with any additional questions.

-Ryan Brown, Esq


Marilyn Traynham

Church & Finance Administrator