THE TAX CUTS AND JOBS ACT OF 2017: HOW WILL THE ACT AFFECT INDIVIDUAL CHARITABLE GIVING?

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1 THE TAX CUTS AND JOBS ACT OF 2017: HOW WILL THE ACT AFFECT INDIVIDUAL CHARITABLE GIVING?

2 There has been much discussion this year regarding the recent and massive overhaul of the US Tax Code and whether or not these changes will impact charitable giving Although the largest tax cuts in the Act were on the corporate side, my focus in this presentason will be on individual charitable giving and how that may or may not be affected by these recent changes.

3 Why individual charitable giving? Charitable giving by individuals makes up the substansal majority of all donasons in the U.S. In 2016: Giving by individuals totaled $ Billion Bequests from decedent s estates totaled $30.36 Billion When combined, these gi^s represent 80% of all donasons made in 2016

4 Which aspects of the Act will have the largest impact on individual giving? Reduced tax rates applicable to individuals Increased Standard DeducSon Enhanced charitable donason deducson Charitable IRA Rollover

5 Proposed Changes Prior to the Act President Trump released the following proposed tax law changes in April 2017: - Reducing from 7 brackets to 3 (10%, 25% and 35%) - Doubling the standard deducson - Providing tax relief for families with child and dependent care expenses - Repeal of the 3.8% Medicare surtax (net investment income tax) - EliminaSng targeted tax breaks that mainly benefit the wealthiest Americans

6 Medicare Surtax Remains No deducson for charitable donasons against medicare surtax (3.8%) Surtax is excise in nature and so no charitable deducson allowed against it Consider gi^ing property that would otherwise produce income subject to the surtax to a qualified charity

7 Marginal Rate ReducSons The Act maintains seven (7) federal income tax brackets for individual taxpayers ReducSon in marginal income tax rates at virtually every level of income Marriage penalty eliminated at every bracket unsl you reach the 35% bracket (couples with combined taxable income of $500k or more could ssll be affected by this penalty)

8 Marginal Rate ReducSons, con t. Overall rate reducsons are significant, however these rates are applied to an individual s taxable income An individual s income will be reduced by either the standard deducson or their itemized deducsons to determine their taxable income The Act eliminates the personal exempson, which prior to 2018 further reduced income in order to determine your taxable income figure

9 Marginal Rate ReducSons, con t. For those who do not itemize, will the increased standard deducson combined with the eliminason of the personal exempson result in a wash, so that no tax savings are felt? This will vary by individual/family, however, for those who end up with a wash, their overall marginal income tax rate should ssll result in lower taxes

10 Marginal Rate ReducSons, con t. The Act doubles the child tax credit AND substansally increases the phase-out limitasons for families who qualify for the credit (threshold is $400k under the Act for MFJ compared with $110k for 2017) For families with children, this doubling of the child tax credit should more than offset the eliminason of the personal exempsons (The Act also increased the refundable porson of the credit)

11 Standard v. Itemized DeducSon The Act nearly doubles the standard deducson from $6, to $12, for single filers From $13, to $24, for MFJ Congressional Research Service reports that in 2014 (most recent data analysis available) 30% of all tax filers itemized deducsons Much larger share of higher income earners itemized when compared with lower earners

12 Standard v. Itemized DeducSon According to CRS analysis, 77% of tax filers with incomes in the range of $100k to $200k itemized deducsons, with an average amount claimed by each filer of $25, % of tax filers in the income range of $200k to $500k itemized deducsons with an average amount claimed of $43, It is arguable that most tax filers in these income ranges will consnue to itemize deducsons despite the increased standard deducson

13 Standard v. Itemized DeducSon Which tax filers in the larger income ranges will be most likely to loose the ability to itemize? Those who live in high property tax areas who depended on the property tax deducson to bring them over the standard deducson so they could itemize The Act limits the state and local tax deducson to a maximum deducson of $10, per household

14 Standard v. Itemized DeducSon The state and local tax deducson limitason will have some impact, as this deducson is the single largest one claimed by households making over $200, The next two largest deducsons claimed by the same households are the charitable deducson and home mortgage interest deducson This income range ($200k to $500k) is responsible for claiming 51% of all charitable deducsons

15 Standard v. Itemized DeducSon The fact that households in the $200k to $500k income range claim a majority of charitable deducsons, combined with the $10k allowance for deducson of state and local taxes that remain means that most tax filers in this range will consnue to itemize The Act s eliminason of the Pease limitason grants addisonal relief to higher income earners to further offset the $10k limit on the state and local tax deducson

16 Standard v. Itemized DeducSon The Pease limitason limited the amount of itemized deducsons allowed by reducing certain deducsons by the lesser of 3% of income over a threshold or by 80% of total deducsons Pease limitasons applied in 2017 if AGI was more than: $261,500 for Individuals $313,800 for MFJ $287,650 for HOH $156,900 for MFS

17 Standard v. Itemized DeducSon The Pease limitason applied to the following deducsons: Charitable Home mortgage interest deducson State and local tax deducson Miscellaneous itemized deducsons (eliminated by the Act)

18 Why do individuals make charitable contribusons? Is a charitable deducson really a mosvasng factor? A charitable deducson does not leave the taxpayer with more money at the end of the day and is not a mosvasng factor A taxpayer who owes $20k in income taxes will not be encouraged to make a $10k charitable donason that only reduces their taxes by $2,500, b/c their cash ouklow increases by $7,500 However, a taxpayer who consistently gives to charity is certainly encouraged that doing so will reduce their overall tax burden

19 DonaSons ConSnue to Increase In 2016, giving by non-itemizers grew by an essmated 3.4% Giving trends in recent history: 2014 $ Billion 2015 $ Billion 2016 $ Billion

20 What data indicates future charitable giving trends the best? What is the most consistent data that reflects if and how much individuals will give to charity? Giving as a percentage of disposable personal income; and Giving as a percentage of gross domessc product

21 Giving USA FoundaSon Data Giving USA creates and updates a data table each year that shows giving as a percentage of disposable income (DPI) From 1976 through 2016 this percentage floated right around 2% The percentage jumps as high as 2.4% in 2000 and as low as 1.7% in 1995, however, in most years the percentage lingers around 2%

22 Giving USA FoundaSon Data Giving USA creates and updates a data table each year that shows giving as a percentage of gross domessc product (GDP) From 1976 through 2016 this percentage ranged from 1.6% to 2.2% Percentages over the last 20 years linger right at 2%

23 Giving USA FoundaSon Data Giving USA s data clearly indicates that individuals will give more as their disposable income increases in a manner consistent with their prior giving If we assume the Act results in more disposable personal income and an increased GDP we can expect giving to consnue and hopefully consnue to increase

24 Enhanced Charitable DeducSon The Act increases the charitable contribuson deducson allowance from 50% to 60% of a taxpayer s adjusted gross income This will benefit high net worth, high income individuals making large donasons, especially those who have an unusually large taxable event such as the sale of a business

25 Enhanced Charitable DeducSon, con t. This increase, when combined with charitable split interest gi^ planning techniques, creates significant planning opportunises for these high net worth, high earner individuals Some lower income earners will also benefit Ex: A single individual who is resred and receives a large porson of tax exempt income but who can ssll itemize due to expenditures for SALT, medical (10% floor reduced to 7.5% by the Act) and charitable donasons will likely be able to deduct more of their charitable donasons each year

26 The Charitable IRA Rollover The IRA charitable rollover (the Qualified Charitable DistribuSon or QCD) allows individuals over 70 ½ to make charitable gi^s directly from an IRA (tradisonal or Roth) up to $100, (Note that Donor advised funds and supporsng organizasons are excluded). Made permanent by PATH Act in December 2015 Does not apply to Inherited IRAs unless account owner is over 70 ½

27 Charitable IRA Rollovers, con t. The Act le^ intact the charitable IRA rollover DistribuSon can be used to sassfy part or all of a donor s RMD Huge benefit to those over 70 ½ who cannot itemize Any distribuson qualifying for the QCD will bypass the donor s income for federal tax purposes

28 Charitable IRA Rollovers, con t. Individuals over 70 ½ who make donasons each year, but not enough to allow them to itemize, can now make those same charitable donasons directly from their RMD By making their donasons directly from their RMDs, these donor s can absorb more of their other income with the standard deducson

29 Charitable IRA Rollovers, con t. For those taxpayers over 70 ½ who will consnue to itemize, the QCD allows them to, in effect, take a 100% charitable deducson Because the RMD income that pays directly to a qualifying charity is not included in the donor s AGI it is also not subject to any limitasons that would otherwise apply to charitable donasons

30 Charitable IRA Rollovers, con t. Because the QCD can potensally provide benefits to ALL levels of income earners over 70 ½, we must educate them about this very important opson before they begin making their charitable donasons each year

31 ReSrement Accounts For those clients who want to make gi^s to charity at their death as part of their estate plan and who have resrement assets, recommend that they name the charity directly as a beneficiary If a charity is designated as a beneficiary in a will or trust, then estate planners should make sure to include a specific provision stasng that any distribuson to a charity should come first from income in respect of a decedent, second from any other income of the estate/trust and, third from any other assets

32 QuesSons? Feel free to reach out with any quessons or comments a^er the presentason. Forest J. Dorkowski, J.D., LL.M (TaxaSon)