A major premise for the tax reform was to simplify the tax laws.
Congress has primarily tackled this goal by limiting or eliminating itemized deductions in exchange for a near doubling of the standard deduction. While the charitable donations deduction was not limited or eliminated by either the House or the Senate, the reality is that proposed changes might actually have a big impact on charities.
What Elements of Tax Reform Might Hurt Charities?
The increase of the standard deduction combined with the reduction of several key itemized deductions are the primary way charities could be hurt. The increased standard deduction reduces the number of taxpayers that will itemize their deductions by roughly 30 million people. The Indiana School of Philanthropy estimates that roughly 82% of all charitable giving comes from taxpayers that itemize. The majority of 30 million people that might take the standard deduction in 2018 will not get any tax benefit from donating to charity, which might discourage people from donating. The Tax Policy Center estimates that individual charitable giving would decline by between $12 – $20 billion in 2018 alone.
An increase of the excise tax on private colleges and universities foundations and endowments proposed by the Senate bill would impose a 1.4% excise tax on net investment income of private colleges and universities that have at least 500 students and aggregate assets of at least $250,000 per student. Currently, private colleges and universities are treated as public charities for tax purposes rather than private foundations, which prevents them from being subject to the 2% excise tax on the net investment income of private foundations.
The increase in estate tax exemption would mean fewer people subject to the estate tax. Taxpayers have historically donated to charities through the creation of private foundations and through direct bequests in their wills and trusts to reduce or avoid the estate tax. With a doubled estate exemption amount as proposed in both the House and the Senate bills, fewer families are likely to give to charities to reduce their estate tax bill.
What Elements of Tax Reform Might Help Charities?
Although an increased adjusted gross income (AGI) limitation percentage might not encourage more people to give, it might encourage cash gifts be donated to charity rather than gifts of highly appreciated assets. Currently, taxpayers can deduct 100% of a charitable donation up to 50% of AGI, against income. The House bill proposed taxpayers could deduct up to 60% of AGI for cash gifts.
Reducing the excise tax on private foundations that currently pay a 2% excise tax, to a flat 1.4% tax as proposed by the House bill. However, current law allows charities that meet certain niche requirements qualify to only pay a 1% excise tax, so those charities would effectively see a tax increase by a flat tax of 1.4%.
Retention of the net investment income tax (NIIT), repeal of the state and local income tax (SALT) deduction, and the retention of the alternative minimum tax (AMT) could help charities keep donations coming from high income taxpayers subject to unchanging or effective tax increases by the tax reform. The NIIT currently charges taxpayers with adjusted gross incomes above $200,000 single/$250,000 joint a surtax of 3.8% on net investment income. The elimination of the SALT deduction might encourage taxpayers who itemize in high income and high state income tax states (like California, New York, New Jersey, Texas, Illinois, and Pennsylvania), to increase other itemized deductions to total more than the standard deduction so they can continue to claim their itemized deductions. The retention of the AMT could encourage taxpayers subject to the AMT to donate portions of their income, or required minimum distributions, to charity to avoid it. While the NIIT, AMT and SALT deduction generally only effect the top 5% of taxpayers, they are the largest segment of charitable donors. These revenue raisers will still likely create incentive for taxpayers from this group to donate to charity to reduce their income tax.
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