Tax Reform and the Impact on Charitable Giving

By restructuring where individuals will fall into various tax brackets, Congress may be changing incentives for philanthropic giving


By Tiya Lim and Ben Hake


Republicans in both the House of Representatives and the Senate have released their versions of the Tax Cuts and Jobs Act. The two proposals have key differences and are still works in progress. The final form of the bill is unknown. Therefore, these observations are based on provisions found in the final House bill and in the bill approved by the Senate.

Although some specifics may be altered during the reconciliation process, it seems likely that these provisions will look substantially similar in any final bill that would be approved by both chambers. Several of the proposed reforms could reduce incentives for charitable giving:

1. Reductions in marginal tax rates and/or increasing income thresholds for various brackets. Reductions in marginal rates 

increase after-tax costs for charitable donations, thereby reducing the incentive to give. Increasing income thresholds can have a similar effect. Tax rates that kick in at higher levels of income than before can also increase the after-tax cost fordonations.

2. Increase to the standard deduction. Both bills would roughly double the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers. Increases to the standard deduction reduce incentives to give by reducing the number of taxpayers who itemize their deductions. Currently, itemizers are estimated to provide about 82 percent of total giving, about $239 billion; non-itemizers, who on average have lower incomes, provide about 18 percent of total charitable giving, about $53 billion. If fewer people itemize, fewer people have a tax incentive to give.

3. Elimination or reduction of the estate tax. This change could also negatively affect charitable giving because such tax reform reduces higherincome individuals’ incentive to give. The estate tax encourages charitable giving by allowing a deduction for charitable bequests. One study published in 2003, when the top estate tax rates were higher than today, estimated that estate tax repeal could reduce charitable bequests between 22 and 37 percent.

Although the tax break for charitable contributions is one of the few deductions retained under both tax bills, other changes would likely reduce its usefulness.

Although the tax break for charitable contributions is one of the few deductions retained under both the Senate and House tax bills, other changes would likely reduce its usefulness. Because the standard deduction would be doubled and most other deductions would disappear under proposed reforms, fewer taxpayers would itemize, which for taxpayers under age 70½ is the only way to take advantage of the deduction for charitable contributions.

Taxpayers over age 70½ will still have the opportunity to give up to $100,000 of their required minimum distributions directly to charity, which allows for the exclusion of that income from their return. Based on the proposed reforms, donors who give charitably due to tax incentives are likely to reduce giving if claiming the standard deduction. However, there are two developments that may increase giving.

First, both bills seek to repeal the Pease limitation which limits the total amount of itemized deductions upper income taxpayers are able to claim. Removing this limit would allow high-income earners to receive a greater tax deduction for their gifts. Second, both the House and Senate tax bills have increased the limit for charitable deductions from 50 percent of a taxpayer’s adjusted gross income to 60 percent. Therefore, for taxpayers who itemize, the amount of gifts that are able to be deducted in a given year will be increased.

In the meantime, this may be a good time to reach out to donors to discuss the potential changes and how they can maximize their charitable gifts. Due to the potential decrease in tax deduction benefit next year, donors may be more willing to accelerate planned gifts to an organization this year. For example, a donor that has split their donation into a 5 year pledge may consider giving more money over a shorter period.

This allows for a greater tax benefit to be recognized this year, and potentially giving more money in other years to trigger the ability to itemize deductions. In addition, with the strong performance of the stock market, many donors have appreciated securities in their investment portfolio.

Giving stock is a good way to give assets without realizing capital gains and receiving a charitable tax deduction. The Senate has proposed getting rid of the specific identification method for selling securities which allows donors to choose specific lots of appreciated securities, preferably with the lowest basis. Under the Senate’s proposal, appreciated securities will be donated on a first-in, first-out methodology. If this change occurs, donors should take advantage of the current ability to select specific securities to donate this year.

About the authors

Tiya Lim is director of institutional services for Creative Planning inLeawood, Kan.

P | 913.338.2727

E | lim@thinkingbeyond.com

 


Ben Hake is senior managing tax director for Creative Planning in Leawood, Kan.

P | 913.338.2727

E | hake@thinkingbeyond.com