The Tax Cuts and Jobs Act and Charitable Giving
Clocking in at 503 pages, the Tax Cuts and Jobs Act reported out of Conference Committee on December 15 is expected to be voted on by the House and Senate this week and presented to President Trump for his signature by December 22. While it is still possible that changes to the bill could be made at this late date, or that it might be delayed or not pass at all, it appears highly likely that it will pass as is before the end of this week.
In the discussion below, we review the particulars of the law that are of most interest to fundraisers, as well as some provisions of interest to fundraisers that did not make it into the Conference version or made it in in altered form.
All of the provisions mentioned below will take effect on January 1, 2018. In order for the bill to comply with the $1.5 trillion cost limit imposed by Senate rules, however, they are all set to expire at the end of 2025. Unless Congress acts before then to extend the provisions or make them permanent, they will be replaced by current law starting in 2026. (In contrast, provisions related to business taxes do not have an expiration date.)
Here are the provisions of note for fundraisers:
- New and generally lower individual tax brackets will apply: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The 37% bracket will apply to married couples filing jointly (MFJ) with taxable income over $600,000 and single filers and heads of households with taxable income over $500,000. The thresholds for the brackets will be indexed for inflation starting in 2019.
- A substantially increased standard deduction - $12,000 for singles, $24,000 for MFJ, and $18,000 for heads of households - and repeal of the personal exemption.
- Repeal of the Pease limitation, which under current law phases out up to 80% of itemized deductions for high income taxpayers.
- An increase in the adjusted gross income (AGI) limitation on charitable gifts of cash to public charities from 50% of AGI to 60% of AGI. The AGI limitation on charitable gifts of appreciated property to public charities will remain 30% of AGI. Donors who itemize will continue to be able to carry forward deductions subject to either limitation for up to five years.
- The charitable deduction will be retained. Most other itemized deductions will be eliminated. Two that will remain:
- State and local taxes. Non-business taxes of this sort will be deductible only up to a combined annual limit of $10,000. Currently, there is no limit on the deduction for non-business state and local taxes.
- Mortgage interest on up to $750,000 of debt for MFJ, a decrease from the current $1 million limit.
- The alternative minimum tax will be retained for individuals, but with higher exemption amounts and higher exemption amount phase-out thresholds.
- The gift tax, estate tax, and generation skipping tax will continue. However, the exemption amounts for each of these taxes will double to $11.2 million per individual, ($22.4 for gift and estate tax for married couples).
- Repeal of the 80% charitable deduction for gifts made in exchange for college athletic event seating rights.
In addition to the above changes, a new 1.4% excise tax on investment income will be imposed on private colleges and universities with at least 500 tuition-paying students, more than half of whom are in the U.S., and that hold endowment assets of more than $500,000 per student. This provision will not affect the tax benefits of donating to these charities.
A number of the provisions that appeared in the House and/or Senate version of the bill, did not make it into the Conference-reconciled version or made it in in modified form.
- The top income tax bracket of 37% is lower than the House’s 39.6% and the Senate’s 38.5%. Both versions had the top bracket starting at $1 million for MFJ, which is reduced to $600,000 in the Conference bill. The number of brackets matches the Senate’s seven, not the House’s four.
- The House and Senate versions eliminated the alternative minimum tax (AMT). The Conference bill repeals the AMT for corporations but retains it in modified form for individuals
- The House bill allowed a mortgage interest deduction on loans of up to $500,000 for MFJ, $250,000 for singles. The Senate bill limits were $1 million for MFJ, $500,000 for singles. The Conference bill split the difference, setting the limit at $750,000 for MFJ.
- The House bill eliminated the deduction for state and local income taxes, but allowed a property tax deduction with a cap of $10,000. The Senate bill eliminated the deduction for all state and local taxes, no exceptions. The Conference bill is more generous than either by allowing deductions for any combination of state and local taxes of up to $10,000.
- The House bill eliminated the estate and generation skipping taxes in 2024, and lowered the top gift tax bracket from 40% to 35% that same year. The Conference bill kept the Senate’s version, which did not eliminate these taxes or alter the top gift tax bracket.
- The House bill would have weakened the Johnson Amendment, which prohibits nonprofits from supporting and contributing to political candidates and campaigns. The Conference bill leaves the Johnson Amendment alone.
The universal charitable deduction that the National Association of Charitable Gift Planners and other charity advocates lobbied for never made it into the House or Senate bill and was not picked up in the Conference bill, either. This would have been an above-the-line charitable deduction to benefit non-itemizers.
On the whole, the bill is ending up being somewhat less discouraging to donors than it was threatening to be. On balance, however, it will not encourage charitable gifts as much as current tax law does. For many donors, the biggest change will be the increase in the standard deduction combined with the reduction in itemized deductions allowed. It has been estimated that about five in six taxpayers who currently itemize will be better off taking the standard deduction in 2018. These taxpayers will receive no tax benefit from their charitable deductions.
We will provide a more detailed analysis of how the Tax Cuts and Jobs Act is likely to affect fundraising, and gift planning in particular, soon.