Is better deductibility back on the table?
Charitable deduction legislation is always changing due to proposed reform efforts that are not static. The result is the occasional change to the provisions of the Internal Revenue Code governing charitable giving. At the same time, popular charitable giving techniques evolve and grow over time, frequently creating new opportunities for your clients to support the causes they love.
For instance, Donor Advised Funds (DAFs) were first deployed as a charitable giving technique in the 1930s—long before their popularity ascended in the 1990s—and recently reachedrecord highs.
Similarly, Qualified Charitable Contributions (QCDs) were codified in 2006 through legislation that initially approved the technique for just about a year, followed by several legislative extensions before QCDs were made permanent by the Consolidated Appropriations Act of 2016. And while QCD annual limits ($100,000 per person and $200,000 for couples) have remained constant in the past, they will change when indexed for inflation under new legislation passed at the end of last year.
As always, legislation pending in Washington—if realized—may influence the techniques your clients employ to meet their charitable goals.
Donor Advised Funds and private foundations
Currently, contributions to DAFs by private foundations fall under the same rules as contributions to DAFs by individuals. This means that funds are not subject to any particular timing requirements to be distributed to charities. Despite the lack of a formal payout requirement, the 10-year average aggregate payout rate from all DAFs is a whopping 22.2%. The 2021 aggregate payout rate was a record 27.3%.
In contrast, private foundations are subject to a 5% annual distribution rule. Under the proposed legislation outlined in General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal (page 139) it would not affect contributions to DAFs by individuals. Contributions to DAFs by private foundations would need to be distributed by the end of the following taxable year and documented as such to qualify for the 5% private foundation distribution requirement. Only time will tell whether if these proposed changes will be signed into law.
Beyond the standard deduction
Tax deductibility of donations has changed with the times. Ongoing legislation, if passed, would again reward charitable-minded tax filers who do not itemize for the 2023 and 2024 tax years.
The Charitable Act, as it is known, would allow deductions of up to one-third of the applicable standard deduction for non-itemizers. Under the higher standard deduction, passed as part of the Tax Cuts and Jobs Act of 2017, many donors who previously deducted their charitable donations lost that ability. Indeed, to the dismay of many nonprofits, tens of millions of fewer households itemized their deductions in the years following the increased standard deduction, removing part of the incentive to make charitable gifts. The Charitable Act would strive to alleviate some of the negative impact on charities.
Recent history shows thattaxpayers respond positively to deductibility opportunities, with 42 million taxpayers taking advantage of the $300 "universal" charitable deduction offered in 2020, and 24% of those taxpayers having gross incomes of less than $30,000. That opportunity was extended in 2021 but discontinued for 2022. Notably,polling has shown strong support for restoring the universal charitable deduction.
Though the potential for restored deductibility in still in the early stage of discussion, KZCF is here to help your clients organize their charitable giving through DAFs and other types of funds.
As the tradition of change continues for charitable giving, KZCF will continue to be your source for smart, efficient and secure gifting strategy.