U.S. Senate & House of Representatives Tax Cuts and Jobs Act Proposals Relevant to Charitable Donors December 14, 2017
Overview These charts review the tax proposals most relevant to charitable donors in the Tax Cuts and Jobs Act passed, by the House of Representatives (referred to as the House Tax Bill ) and the Tax Cuts and Jobs Act passed by the U.S. Senate on, (referred to as the Senate Tax Bill ). The charts also compare the proposed changes to current law. The backdrop: Republican Congressional leadership and President Trump are aiming for the completion of tax reform before year end. Congress will need to reconcile the two versions of the bills before a final bill can be brought to a vote in each house. The two versions differ in significant ways, and reconciling the bills may take significant time and effort. New provisions could be added to the bill as part of the reconciliation process. Congress must also address a spending bill before the year end. The summaries in this chart must be considered against the background of a fluid and changing situation. Significant provisions of the new House and Senate Tax Bills relevant to donors: The House and Senate Tax Bills have retained the charitable contribution deduction. However, the tax advantages of charitable giving would be impacted by rate reductions and changes to other itemized deductions and the standard deduction. Most of the provisions of the House Tax Bill and the Senate Tax Bill would become effective for tax years beginning after 2017. However, many of the Senate Tax Bill s provisions, including the changes to the charitable deduction, tax rates, and other deductions, would expire after 2025. The law would then revert back to current law. Both the House and Senate Tax Bills provide for an enhanced charitable contribution deduction for gifts of cash to public charities, limiting the deduction to 60% of adjusted gross income (AGI), rather than the current limit of 50%. Both bills would eliminate the current deduction for contributions in exchange for the donor s seating rights at college and university athletic events. The House Tax Bill revises the charitable mileage deduction, allowing the inclusion of variable costs of operation of the vehicle, such as gas and oil, directly related to the charitable use. Both bills repeal the existing exception from the substantiation requirement of a contemporaneous written acknowledgement in order for a donation to be deductible, under which the donee organization may instead file a return containing the same information as would be in the acknowledgement. The use and value of the charitable deduction to donors may be impacted in several ways by the tax bills. As a consequence of the increased standard deduction and the elimination of many itemized deductions, many donors would no longer be able to itemize deductions meaning they would no longer receive a federal income tax benefit from charitable giving. But for those donors who could still itemize, itemized deductions would no longer be subject to the itemized deduction phaseout, currently applicable to high income taxpayers. Finally, the tax savings from the charitable contribution deduction could also be less, due to the lower tax rates. 2
Overview (cont d) The changes that could impact whether a donor will be able to itemize deductions and the potential tax savings from it are described below. The House Tax Bill would replace the current seven individual tax brackets with four brackets ranging from 12% to 39.6%, while the Senate Tax Bill would keep seven tax brackets with rates ranging from 10% to 38.5%. Neither bill contains any changes to the capital gains tax, net investment income tax, or the Medicare Surtax. Both bills would nearly double the standard deduction for taxpayers. Itemized deductions are mainly limited to mortgage interest, real estate taxes, and charitable contributions in the House Tax Bill. Both bills eliminate the deductions for state and local income taxes and sales taxes, and limit deductions for real estate taxes to $10,000. The Senate Tax Bill largely retains the home mortgage interest deduction, while the House Tax Bill would significantly limit it. Each bill repeals the deduction for home equity interest. Both tax bills contain many other provisions that affect numerous other deductions and credits for individuals. The Senate Tax Bill disallows the specific identification method for sale of stock (or donative transfers to family or charity) and requires transfers to be made on a First-in-First-out (FIFO) basis. The Senate Tax Bill retains the estate, gift, and generation-skipping transfer (GST) tax for larger estates (doubling the exemptions), while the House Tax Bill would initially double the exemptions and then later repeal the estate tax and the GST. Like many of the income tax provisions, the Senate Tax Bill transfer tax changes terminate after 2025 and revert back to current law. Heirs will continue to have a fair market value basis in inherited assets under both bills, and the gift tax remains in place. Neither bill changes the current law provisions allowing a charitable deduction from estate and gift tax and treating charitable transfers as not subject to the GST tax. With the increased exemptions, far fewer taxpayers would be subject to the estate, gift, or GST tax, and none would be after 2024 under the House Tax Bill. Thus, fewer donors than under current law would have a transfer tax benefit from charitable giving. The elimination of tax incentives for charitable giving for many donors, of course, may also significantly affect the charitable recipients. For charities that typically receive smaller donations from donors who don t itemize deductions, and are not subject to the federal estate tax under current law, there should be limited impact. But charities who receive substantial funding from donors losing the ability to itemize, or who would no longer be subject to the estate tax, could see donations reduced. On the other hand, charities working with donors who would have been subject to the itemized deduction phase-out or the 50% AGI limit may see heightened giving from donors who can create even more tax-effective gifts. 3
Federal Income Tax Changes to the Charitable Contribution Deduction Deduction for cash gifts to public charities Charitable contribution deduction for cash gifts to public charities up to 50% of AGI Charitable contribution deduction for cash gifts to public charities increased to 60% of AGI Charitable contribution deduction for cash gifts to public charities increased to 60% of AGI Charitable mileage deduction 14 cents per mile statutory rate permitted as deductible out-of-pocket expense in connection with providing donated services Mileage rate to be revised by IRS to include out-ofpocket operating expenses such as gas and oil Deduction for colleges athletic seating rights Charitable deduction permitted for 80% of payment to colleges and universities giving donor the right to purchase tickets for an athletic event Eliminates Eliminates Acknowledgement of charitable contributions Exception from the deduction substantiation rules permits a donee to file a form with the IRS rather than providing the required contemporaneous acknowledgement letter Repeals exception Repeals exception 4
Federal Income Tax Provisions Impacting Availability of and Savings from Charitable Contribution Deduction Rates on ordinary income* Seven brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% for income above $418,400 (single); $470,700 (married) Indexed for inflation Seven brackets:10%, 12%, 22%, 24%, 32%, 35%, and 38.5% for income above $500,000 (single); $1,000,000 (married) Indexed for inflation after 2018 Four brackets: 12%, 25%, 35%, and 39.6% for income above $500,000 (single); $1,000,000 (married); indexed for inflation after 2018 12% bracket would be phased out for income over $500,000 (single); $1,200,000 (married) Standard deduction $6,350 (single and married filing separately); $9,350 (head of household); $12,700 (married); Indexed for inflation $12,000 (single and all other taxpayers); $18,000 (head of household); $24,000 (married) Indexed for inflation after 2018 $12,200 (single); $24,400 (married); $18,300 (head of household) Indexed for inflation after 2019 Itemized deductions State and local property taxes fully deductible; state and local income tax or sales tax fully deductible Home mortgage interest deduction for up to two residences, $1,000,000 debt limit; $100,000 debt limit for home equity Allows medical expense deduction Allows student loan interest deduction Itemized deductions phaseout for adjusted gross income (AGI) over: $261,500 (single); $313,800 (married) Eliminates most itemized deductions: State and local taxes: Property tax retains with $10,000 limit (not indexed for inflation) Sales tax eliminates Income tax eliminates Retains home mortgage interest; repeals deduction for home equity interest Charitable contribution deduction for cash gifts to public charities increased to 60% of AGI Retains medical expense deduction for expenses in excess of 7.5% of AGI for 2017 and 2018 Retains student loan interest deduction Eliminates miscellaneous itemized deductions subject to 2% floor Retains investment interest deduction Eliminates personal exemption Eliminates personal casualty loss except for disasters Eliminates tax preparation expense Eliminates itemized deduction phase out Eliminates most itemized deductions: State and local taxes: Property tax retains with $10,000 limit (not indexed for inflation) Sales tax eliminates Income tax eliminates Retains home mortgage interest up to $500,000 of indebtedness after 11/2/2017; existing mortgages are grandfathered. Limits to principal residence; no home equity interest Charitable contribution deduction for cash gifts to public charities increased to 60% of AGI Eliminates medical expense deduction Eliminates student loan interest deduction Retains miscellaneous itemized deductions subject to 2% floor Retains investment interest deduction Eliminates personal exemption Eliminates personal casualty loss except for disasters Eliminates tax preparation expense Eliminates itemized deduction phase out 5 *Current law and the House and Senate Tax Bills also provide separate income brackets for head of household and married filing separately.
Federal Income Tax Provisions Impacting Availability of Charitable Contribution Deduction Rates on capital gains/dividends Top rate of 20%,1-year holding period Surtax on net investment income 3.8% above $200,000 AGI (single); $250,000 (married); Trusts with income over $12,500 Alternative minimum tax (AMT) 28% minimum rate, with exemption amount of $54,300 (single); $84,500 (married); $24,100 (Trusts) as indexed for inflation Increases exemption amount to $70,300 (single); $109,400 (married); $54,700 (married filing separately) Phases out at $156,300 (single); $208,400 (married); $104,200 (married filing separately) Eliminates; may claim a refund of unused AMT credits: 50% in 2019, 2020, 2021, and 100% in 2022 6
Federal Transfer Taxes Charitable Contribution Deduction Estate tax rate and exemption Top tax rate of 40% $5,490,000, as adjusted for inflation Retains estate tax Increases exemption to $10,000,000, indexed for inflation after 2011 Retains estate tax; repeals after 2024 Increases exemption to $10,000,000, indexed for inflation after 2011 Lifetime gift tax rate and exemption Top tax rate of 40% $5,490,000, adjusted for inflation Retains gift tax Increases exemption to $10,000,000, indexed for inflation after 2011 Retains gift tax; 2017-2024 top rate of 40%, after 2024 top rate of 35% Increases exemption to $10,000,000, indexed for inflation after 2011 Generationskipping transfer tax rate and exemption Top tax rate of 40% $5,490,000, as adjusted for inflation Not applicable to charitable transfers Retains generation-skipping transfer tax Increases exemption to $10,000,000, indexed for inflation after 2011 Retains generation-skipping transfer tax; repeals after 2024 Increases exemption to $10,000,000, indexed for inflation after 2011 Not applicable to charitable transfers Not applicable to charitable transfers 7
Federal Income Tax Changes to Private Foundations Excise tax on net investment income 2% excise tax on net investment income, which is reduced to 1% for years in which foundation distributions exceed historic level Simplified to provide a flat 1.4% rate on net investment income Excess business holding rules on business ownership Private foundations are subject to an excise tax on ownership of more than 20% (35% if no control) of the voting stock, profits interest, or beneficial interest of a business enterprise Exception for business enterprise 1) held 100% by private foundation, none of which was purchased; 2) which distributes all income annually to the private foundation; and 3) meets an independent operation test Private operating foundation requirements related to art museums Definition of private operating foundations does not require set number of hours of operation for an art museum Requires an art museum to be open to the public during normal business hours for at least 1,000 hours per year Sources: Joint Committee on Taxation, Description of the Chairman s Modification to the Chairman s Mark of the Tax Cuts and Jobs Act, November 14, 2017, passed by Senate Finance Committee on. Joint Committee on Taxation, November 9, 2017, Description of the Chairman s Mark of the Tax Cuts and Jobs Act. House of Representatives Committee on Ways and Means, H.R. 1 Tax Cuts and Jobs Act, November 2, 2017, as amended and as passed by the House of Representatives. 8
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