2017 has been a year of great change and uncertainty. As we move into 2018, we look at how federal tax legislation and other developments may or may not impact nonprofits in the year to come.
It might be said that 2017 has been “business as unusual” from a philanthropic perspective.
The year began with the inauguration of a new administration promising to replace the healthcare system, address the nation’s infrastructure challenges and provide sweeping tax cuts for everyone.
With such potential changes on the horizon, those working with individuals contemplating larger charitable gifts either as isolated transactions, or as part of a broader estate and financial plan, began the year with uncertainty. Would the charitable deduction remain in the new tax code? Would the deduction survive but be capped or effectively eliminated for most through higher standard deductions? Would federal estate and/or gift taxes be repealed?
For the first several months of the year, Congress wrestled with the healthcare issue before abandoning it and turning their attention to tax reform. That process began with several competing plans—all put forth by various segments of the majority party.
House and Senate tax plans
As of late November, both the House and Senate had proposed plans that significantly lower corporate tax rates while adapting a “modified flat tax” approach for individuals. Most deductions, including state and local taxes, are eliminated in one or both plans, with the exception of the charitable and mortgage interest deductions (with different caps on mortgage interest). Both plans exempt the charitable deduction from cuts and even increase the adjusted gross income (AGI) limit for charitable deductions from 50 percent to 60 percent for gifts of cash.
Fate of the charitable deduction
So far, so good for philanthropy and tax reform. But as always, the devil is in the details. It is true that both plans fully retain the charitable deduction and cap the mortgage interest deduction, and a limited property tax deduction is included in the House plan. However, both proposals also eliminate personal exemptions and increase the standard deduction to $12,000 for individuals and $24,000 for married couples.
The increased standard deduction is tantamount to a flat tax for most Americans. Only an estimated five to 10 percent of taxpayers have mortgage interest and charitable deductions that exceed standard deduction levels, so far fewer would itemize deductions under the proposed plans. One mitigating factor is the House’s proposal to allow homeowners to deduct up to $10,000 in property taxes. That deduction would go a long way to restoring a “practical” charitable deduction by helping middle and upper-middle class taxpayers who own homes meet the standard deduction level. Some critics of this proposed change question if home ownership should determine whether donors are allowed to make their charitable gifts from funds not otherwise subjected to tax.
On the other hand, both plans propose to repeal the Pease Limitation on itemized deductions. When combined with the fact that many higher income individuals have mortgage interest deductions that nearly, if not completely, clear the standard deduction “hurdle,” many of the top five percent of taxpayers would continue to make their gifts from pre-tax dollars and continue to enjoy today’s tax benefits from their charitable gifts while the remainder of donors would give from after-tax dollars.
What about the middle class?
In early November, it became clear that tax cuts were being partially funded by new taxes on charitable giving. For example, a donor in a 33 percent marginal tax bracket who itemized deductions in the past but would not under the new tax code may now have to earn $15,000 in pretax income to give $10,000. Taking notice, charities began mobilizing to have Congress return tax incentives to the middle class.
The leading contender to repair the damage that tax-simplification threatens to visit on middle class giving is the so-called “Universal Charitable Deduction.” Sometimes referred to as an “above the line deduction,” it is not a deduction at all, but rather an exemption from adjusted gross income (AGI), for amounts given to charity. The donor described previously would still only have to earn $10,000 to give $10,000 if he or she can deduct their gifts before arriving at their AGI for tax purposes.
Much like the traditional treatment of alimony and unreimbursed business expenses, this approach recognizes that, unlike mortgage interest, charitable gifts do not represent a choice of ways to expend discretionary income. Rather, donors voluntarily forego income to fund societal needs that would otherwise be borne by government or not met at all.
As Give & Take goes to press, the charitable community is encouraging the “above the line” treatment of charitable gifts, though the exact details of the proposal are still not completely clear.
Looking to the future
As the end of the year approaches, many have become aware of other factors that often influence the nature and scope of charitable gifts, including rapid increases in the value of real estate and investment assets seen in 2017.
It has become increasingly clear that gifts of appreciated securities and other qualified assets may never yield more tax benefits than they will before the end of 2017. Many astute planners have advised their clients to accelerate pledge payments and other gifts that may be planned for future years into 2017. Not only would gifts made this year not trigger a capital gains tax on the increased value, but the entire value of the asset would be deductible against a higher tax rate than is likely in future years; in other words, donors may never save as much in taxes again.
Another byproduct of the strategy to give securities this year, for those who believe an investment market correction may be overdue, is the donors’ ability to conserve cash and use it to buy back into the market at a lower value. This can help diversify donors’ portfolios and allow for purchases of shares at bargain prices that may not have been seen since 2009.
For similar reasons, many thoughtful investors with philanthropic leanings have taken a fresh look at charitable remainder trusts (CRTs) and other split interest gifts that allow for charitable deductions this year (against what may be higher rates) while also realizing gains free of capital gains tax.
Estate and gift taxes
Both the House and Senate versions of tax reform increase the threshold for applicability of estate and gift taxes. The House bill repeals the estate tax in six years while maintaining the gift tax, while the Senate bill retains them both but at a higher threshold.
In any event, it has become clear that the world of estate and gift tax planning may be concentrated in the upper echelon of American society. The top 1/10 of 1 percent, or 1 out of 1,000, are the only ones who would need to seriously consider the impact of federal estate taxes.
The net effect
Some aspects of the proposed tax plans may, in fact, be good news for those helping clients plan for the eventual transfer of their assets to their heirs and charitable interests. A simpler code may usher in a golden age of estate planning—a world in which clients can do what they would like without an imposing tax system that has too often interfered with what people want to achieve.
The future of estate planning in general, and philanthropic planning in particular, may only be limited by the imagination of clients and advisors who are able to navigate these new waters guided only by the desires of their clients. ■
Tax Reform Updates and Implications
Sharpe Group experts will keep you informed about tax reform legislation and how changes may affect charitable giving through our blog, seminars and speaking engagements.
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Sharpe Gift Planning Seminars will include the latest tax law changes and their implications for charitable gift planning. Click here for the 2018 schedule.
Members of our team will be available to speak to fundraising groups and staff on the implications of tax law changes. Learn more about our Speakers Bureau click here or contact us for more information at 901.680.5300 or info@SHARPEnet.com. ■