With control of both the White House and Capitol Hill, Republicans have put rewriting the tax code near the top of their policy agenda for 2017.
What they do could have big consequences for nonprofits: Analysts at the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, said President Trump’s tax plan would reduce giving by 4.5 percent to 9 percent, or between $13.5 billion and $26.1 billion, if fully implemented this year.
Here are some key pieces of tax law that influence charitable giving to keep an eye on: the charitable-tax deduction, the standard deduction, marginal income-tax rates, and estate tax.
Charitable-Tax Deduction
Current law
Individuals can write off up to 50 percent of their adjusted gross income by deducting gifts to qualified charities (Adjusted gross income, or AGI, is defined as income minus some deductions, like for payments on student-loan interest and contributions to health-savings and individual-retirement accounts). People are only allowed to deduct 30 percent of their adjusted gross income if they give to private foundations.
Taxpayers can donate cash, stocks, and other assets, such as art or property. They are allowed to deduct the fair-market value of the asset on the date the contribution was made and do not have to pay capital-gains taxes, which otherwise are imposed on the profit made when an asset that has increased in value is sold.
About 30 percent of Americans, mostly in higher income brackets, itemize their deductions, including for charitable gifts, according to estimates by tax-research groups. The rest take the standard deduction (see next section).
Possible changes
The tax plan President Trump touted during the campaign called for capping all itemized deductions — including for charitable gifts — at $100,000 for single filers and $200,000 for married couples.
However, some lobbyists who were in communication with Trump team during the campaign said some of the then-candidate’s advisers favored protecting the charitable tax deduction. And Representative Kevin Brady — chairman of the Ways and Means Committee, which oversees tax legislation — said at a Bloomberg BNA lunch in November that House Republicans would preserve the deduction and were “looking to see if there’s a way to unlock more charitable giving.”
House Speaker Paul Ryan’s tax-reform blueprint, released in June 2016, also called for retaining tax incentives for giving but did not specify whether current rules would be kept in place. Senate Finance Committee Chairman Orrin Hatch has also expressed support for charitable tax incentives in the past.
Why it matters
Nonprofit leaders say limits on the charitable tax deduction would diminish wealthy and middle-income donors’ incentive to give.
— Timothy Sandoval
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Standard Deduction
Current law
Taxpayers who do not itemize can reduce their taxable income by taking the standard deduction, which in 2016 was $6,300 for single filers, $12,600 for married couples, and $9,300 for individual heads of households, such as single parents. Adjustments are made each year to the standard deduction based on inflation. There is no adjustment to the deduction for charitable giving, so there is no tax incentive for nonitemizers — the 70 percent of taxpayers who take the standard deduction — to donate to charity.
Possible changes
Top Republicans have indicated they want to increase the standard deduction. Candidate Trump’s tax plan called for raising it to $15,000 for single filers and $30,000 for couples. Paul Ryan’s blueprint calls for increasing the deduction to $24,000 for married couples and $18,000 for single people.
Why it matters
Charity leaders fear that a big increase in the standard deduction will mean that millions fewer people will itemize — and thus have no financial incentive to give to charity. The Tax Policy Center estimated that under Mr. Trump’s tax plan, about 27 million of the 45 million people who itemize would stop doing so.
— Timothy Sandoval
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Marginal Income-Tax Rates
Current law
Americans are taxed at seven different rates, depending on their income. The top rate for the wealthiest Americans is 39.6 percent; others pay taxes at rates between 10 percent and 35 percent.
Possible changes
Most Capitol Hill observers expect Congress will cut taxes, as President Trump and Republican leaders in the House and Senate are working from a similar playbook. Mr. Trump’s campaign tax proposal and Mr. Ryan’s plan both call for reducing the number of tax brackets from seven to three: 12 percent, 25 percent, and 33 percent.
The most recent significant tax plan considered by Congress called for a similar cut. Introduced in 2014 by then-Representative Dave Camp, who chaired the Ways and Means Committee, it also called for just three tax brackets, with rates of 10 percent, 25 percent, and 35 percent.
Why it matters
Cutting taxes would leave Americans with more money to give, but it could also reduce their incentive to do so because their charitable deductions would become less valuable. Wealthy donors today, for example, get nearly $400 in federal tax savings for every $1,000 in charitable giving. If the top rate dropped to 33 percent, they would net only about $330 in tax savings. In other words, as rates decline, the financial incentive to give shrinks as well.
The wealthy appear to pay attention to these changes, says Williams College economist Jon Bakija. He found evidence of this in a study of giving by Americans with real incomes of $500,000 or more during a period when the tax rate dropped. When the top rate was 70 percent in the 1970s, donations from these tax filers averaged 8.2 percent of their disposable income. From 1988 through 2007, when rates were reduced several times until the top bracket was 28 percent, their gifts averaged only 5 percent of disposable income — 38 percent less.
Reducing rates “is potentially a big deal,” says Howard Husock, a scholar with the Manhattan Institute. “Back of the envelope, you have to figure there’s going to be a billion-dollar hit” on charitable giving.
He points to donor-advised funds as a wild card in any such estimates, however. Many Americans are adding to those funds now, capturing the value of today’s charitable deduction. Mr. Husock expects those donors will make grants from those funds in the years after a tax overhaul and help sustain overall giving levels.
— Drew Lindsay
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Estate Tax
Current law
Wealth that is passed on to heirs following a death is taxed at a rate of 40 percent. The tax only applies to estates larger than $5.49 million; all wealth transfers under that amount are exempt. Charitable bequests are deductible under the estate tax and therefore reduce the amount of tax owed.
Possible changes
Republicans in Congress have long wanted to repeal the estate tax, deriding it as a “death tax.” Over the past decade, GOP lawmakers have attempted to increase the exemption and lower the tax rate. During the campaign, Mr. Trump called for abolishing the tax.
“American workers have paid taxes their whole lives and they should not be taxed again at death,” he said as he unveiled his economic platform in August. “It’s just plain wrong.”
Why it matters
The estate tax affects a tiny slice of the wealthiest taxpayers, not “American workers” generally, because the exemption is so large. Only 5,190 individuals dying in 2017 will owe the tax, according to a projection by the Tax Policy Center.
But those individuals, clustered in the highest tax brackets, account for a huge chunk of total giving. They would have less incentive to donate if the tax is repealed, according to some experts, because giving to charity allows them to reduce their tax burden. In a 2004 analysis, the Congressional Budget Office predicted that eliminating the estate tax would result in a reduction in charitable giving of between 6 percent and 12 percent.
Some observers say, however, that eliminating the tax would free up wealthy donors’ assets, allowing them to give even more to charity.
Steve Seleznow, president of the Arizona Community Foundation, says it is hard to predict how donors would respond to an estate-tax repeal.
In his state, for example, where residents tend to be more conservative and favor lower taxes, the tax as it exists now helps spur donations because donors “believe they can make better decisions about where to invest for social outcomes than the federal government,” Mr. Seleznow says. In other words, they would rather give to charity than to the government. While voiding the tax could free up more taxpayer assets, giving people more assets to donate, Mr. Seleznow suggests the lack of a tax incentive could ultimately have a chilling effect on giving.
— Alex Daniels
Correction: This story has been revised to accurately reflect Mr. Seleznow’s comments that the current estate tax fosters giving and that doing away with the tax incentive may reduce giving.
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