Earlier this week, a charity auction to have lunch with Warren Buffett resulted in a winning bid of $3,300,100. The winning bidder, who has chosen to remain anonymous, won the right to eat with the billionaire at Smith & Wollensky steakhouse in New York City. The annual lunch with Buffett benefits Glide Foundation, which offers food, shelter, health care and other services to homeless and low-income people in San Francisco.
When you have the means to spend $3 million on lunch, you might not be looking for a tax break. But in this case, the bidder may qualify for one. Here’s why it could make good tax sense this year:
1. Bunching. With new tax reform provisions now in play, fewer taxpayers will be itemizing their deductions on Schedule A thanks to a doubled standard deduction (you can see the standard deduction numbers for 2018 and more here). That means that bundling charitable gifts can be advantageous. With bundling, instead of regularly making small gifts over time, you make less frequent, but larger gifts. The result is that you convert donations which might not have been deductible under the new tax scheme into usable deductions. That lump sum donation now makes a lot of sense.
For the rest of us, the dollar amounts might be smaller, but the planning still works. While an annual donation of $2,000 might not result in a charitable deduction under the current tax rules, consider a play from the bidder’s book: spend big at once. Instead of giving $2,000 for each of five years, consider giving $10,000 in one year. The total gift is the same, but you’ll likely benefit on the tax side from a one-time more significant donation.
(For more on charitable giving, click here.)
2. Higher contribution limits. By law, the amount you can deduct for charitable contributions is typically limited to a percentage of your adjusted gross income (AGI). Under prior law, that limit for cash or cash-equivalent gifts was 50%. Following tax reform, the new limit is 60%.
Let’s assume that the bidder’s AGI for the 2018 year was $5 million. Let’s also assume that this was the bidder’s only charitable gift for 2018. Under prior law, the bidder’s charitable deduction would have been limited to 50% of AGI in year one, or $2.5 million; the remainder, a little over $800,000, would be carried forward (more on that in a bit). But under the new law, the bidder’s charitable deduction is limited to 60% of AGI, or $3 million; again, the remainder gets carried forward. The result? A bigger deduction in year one.
So what about the remainder? If your donation exceeds the charitable contribution limits, you can carry the remainder forward for up to five years (limits on contributions are also carried forward). Under our example, the bidder could claim $3 million in year one, and the excess in year two – unless the bidder again opts to dine with Mr. Buffett for charity. Under the rules, you must apply your current year charitable contributions before you use any carry forward. So if the bidder spends big again next year and hits the 60% of AGI limit ($3 million), the excess deduction gets rolled to year three. That pattern continues until the carry forward hits the five-year mark and disappears.
For the rest of us, this presents the opportunity to combine two parts of the new law. We now know that bundling (see again #1) results in a charitable deduction which might otherwise be lost. But if you’re worried that bundling might be a bad idea because of those charitable contribution limits, the bump to 60% means that you can maximize your deduction in one year. Here’s how that makes a difference:
Let’s say that your AGI is $100,000 and you make $55,000 in charitable contributions in one year by bundling instead of, say, $11,000 each year for five years. Under prior law, you could only deduct 50% of your AGI in that tax year ($50,000), and you would carry the remaining $5,000 forward. But under the new law, you can deduct up to 60% of your AGI – or in this case, the entire $55,000 in one year. Result? A more favorable outcome.
And if the limits on your AGI – or the bounds of your charitable giving – make it likely that you’ll max out your available contributions in any given year, those carry-forward provisions will apply to you, too.
3. No more Pease limits. Speaking of limits, under the old law, the total itemized deductions were limited for high-income taxpayers. The Pease limitations, named after former Rep. Don Pease (D-OH) effectively reduced the total amount of deductions you could claim on your return once your AGI hit certain dollar amounts. For 2017, the threshold amounts were $261,500 for single taxpayers or $313,800 for married couples filing jointly. Pease limitations applied to charitable donations, the home mortgage interest deduction, state and local tax deductions and miscellaneous itemized deductions but did not apply to medical expenses, investment expenses, gambling losses and certain theft and casualty losses.
(You can read more about Pease limitations and see the math here.)
Under the new law, the overall limitation on itemized deductions has been repealed (no more Pease). That means that as income goes up, the ability to claim previously limited itemized deductions no longer goes down.
For the rest of us, this means that the bleeding stops a little. The new tax law slashed some available deductions under Schedule A, including the home office deduction and unreimbursed job expenses, and limited others, like the home mortgage deduction and state and local taxes (you can see what your Schedule A might look like here). But charitable giving, previously subject to the Pease limits, survived the cuts fully intact.
4, Record-keeping rules are still in place. Despite fears that tax reform might make it more difficult to claim charitable contributions, there weren’t too many changes to the charitable giving rules. The notable exception for individual taxpayers was the repeal of a provision which allowed for an exception to the substantiation rule if the donee organization files a return. The change means that taxpayers who intend to claim charitable gifts must maintain reliable written records to substantiate the deduction, regardless of the value or amount of such contribution (but you did that already, right?).
Fortunately for Buffett’s new lunch date, the nature and value of the winning bid on eBay for Charity has been reasonably well documented in the press. There’s just one more step. When a contribution worth more than $75 is part charitable gift and part consideration for goods or services, it’s referred to as quid pro quo (for more on quid pro quo, click here). In that event, the charity is required to inform the donor in writing that only the portion exceeding the value of the goods or services is deductible.
In other words, the bidder can’t write off $3,300,100 – the value of the lunch has to be taken into consideration. In this case, the winner can bring up to seven friends to have lunch with Buffett. So what would lunch run? According to Allison Good, Vice President of Marketing and Communications at Smith & Wollensky, Buffett typically orders a medium rare Colorado Rib Steak, Hashed Browns, Creamed Spinach, and Cherry Coke, which should run around $100 before tax and tip. Luncheon guests are free to order anything that they would like from the menu (you can see it here). There are no restrictions, and Good says that guests typically order steakhouse classics, like a shellfish bouquet, Smith & Wollensky USDA Prime dry-aged steaks, a variety of sides – and they save room for dessert and coffee. Since Buffett is notoriously frugal, I’m going to assume that his guests would spend a bit more than he does, so that the lunch tab for seven at the trendy steakhouse, with tax and tip, would run close to $1,800. In that case, the potential charitable deduction wouldn’t be $3,300,100, but $3,298,300 ($3,300,100 less $1,800).
For the rest of us: The same rules apply. If you buy an item at a charity auction, you may claim a charitable deduction for the difference between the price that you paid and the fair market value of the item. And whether your donation is $3 or $3 million, always get a receipt.
The bottom line: You don’t have to be a millionaire – or a billionaire – to donate to charity. In fact, when it comes to the latter, making more money could make it less likely that you benefit on the tax side. The 87-year-old Buffett has an estimated fortune of $83.6 billion, landing him at #3 on Forbes’ billionaire list just behind Amazon’s Jeff Bezos and Microsoft’s Bill Gates. However, during the run-up to the presidential elections, Buffett reported that his charitable contributions for the 2015 tax year were $2,858,057,970, of which “more than $2.85 billion were not taken as deductions and never will be,” noting at the time that “[t]ax law properly limits charitable deductions.”
For more on making charitable gifts count, click here.
(Author’s note: Updated to include a statement from Smith & Wollensky.)