March 27, 2018

The New Tax Law and Charitable Giving

With Tax Day upon us, it's important to be up to date on the new tax law and its impact. Here are some of the salient provisions to be aware of:

  • The corporate tax rate is cut from 35% to 21%
  • The maximum individual tax rate is reduced from 39.6% to 37% while other brackets are reduced as well (except for those earning $9525 or less)
  • The standard deduction is increased to $12,000 for singles and $24,000 for couples
  • Personal exemptions are repealed for all income levels
  • The deduction for state and local taxes (SALT) is capped at a total of $10,000
  • Long term capital gains on appreciated property are still taxed at 20%
  • Mortgage interest deduction is limited to total mortgages cumulatively of $750,000
  • The deduction for interest on home equity loans is eliminated
  • Cash gifts to charity are now deductible up to 60% of adjusted gross income, up from 50%
  • The estate tax exemption from tax was doubled to $11.2 million for singles and $22.4 million for couples
  • The individual mandate requiring those without health insurance to pay a penalty under the Affordable Care Act is repealed

As with all acts that have such a broad and sweeping scope, the long term impact of this law will be unfolding with time. Many individuals received bonuses as a result of the new law and many more will see some increase in their take home pay. It is estimated that the bill will have the effect of adding some $1.4 trillion to the deficit over time. For the moment, however, short term benefits will likely “trump” longer term deficit concerns.

But what does this all mean for charitable giving in 2018 and beyond?

Here are some of the possible implications of the newest tax bill:

  • More standard deductions rather than itemizing. Since the standard deduction is being increased, many more persons will use the standard deduction in the future instead of itemizing deductions as in the past. This may tend to dampen charitable giving since the gift will not be deductible for tax purposes. One option to counteract this tendency is to encourage prospects to double up gifts in one year so that they qualify for itemizing that year and take the standard deduction the next year without such gifts.
  • The charitable rollover from IRA’s will become increasingly important. More and more prospects are reaching the age of 70.5 with substantial assets in IRA’s. This can be used up to $100,000 each year and such distributions to charity “count” towards that year’s required minimum distribution.
  • Gifts of appreciated assets may become more relevant. The stock market has been in a bull mode now for many years and we still have a capital gains tax under the new tax law.
  • Major cash donors For those prospects looking to make “hefty” gifts of cash, the deductibility limit for such gifts has been increased from 50% to 60% of adjusted gross income.
  • In states with high state and local taxes, the new ceiling of $10,000 on deducting such taxes is going to increase the potential impact on charitable giving since there is no similar on deducting such gifts.
  • Estate gifts may decrease. The increase in the estate tax exemption may put a damper on estate gifts for those prospects whose total taxable estate is now covered by the new limits; however, this provision sunsets in 2025 to return to current levels, so planning with prospects with assets in this range is likely to be a bit tricky.

No doubt there will be further reverberations from the new tax law as its implementation beginning this year takes effect, and no doubt that charitable giving may feel some of the impact of the new law, perhaps negatively. Charities, however, need to continue to believe that tax savings is almost never the primary reason why prospects make gifts. Prospects make gifts because they believe in the mission of the organization and want to be a partner in its future. For all of the changes wrought by the new law, this is the best news for charities.

Written by

Jon Heintzelman

Jonathan R. Heintzelman is Chairman of Ter Molen Watkins & Brandt.


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