January 24, 2017

With a new administration taking office, tax reform is a topic that has received a lot of attention.  While what will ultimately pass and be signed into law is anyone’s guess at this point, there are a number of potential provisions that could have an impact on charitable giving and ultimately, on the tax-exempt sector.

Removal of the deduction for charitable contributions. While it seems unlikely that Congress would repeal the deduction altogether, in the current climate everything may be on the table.

Cap on itemized deductions. One Trump proposal was to cap itemized deductions at $100,000 for single taxpayers and $200,000 for couples.  A dollar cap on itemized deductions would mean a higher cost of giving for some donors.  This, in turn, could discourage charitable giving particularly as it relates to large contributions.  Similarly, the cap may reduce contributions to donor-advised funds (DAFs) and private foundations (PFs).  Currently, donors may generally receive a deduction for charitable contributions up to 50% (DAFs) or 30% (PFs) of their adjusted gross income.  In a high-income year, a donor may contribute a large amount to a DAF or PF and receive the deduction in the current year although the money will not be disbursed into the “charitable stream” until later years.  If itemized deductions (including charitable deductions) are limited to a specific dollar amount in a given year, this planning technique may be less beneficial to the donor.

Lower tax rates.  One change almost certain to come with tax reform under the new administration is the lowering of personal and corporate income tax rates.  Lower tax rates (possibly coupled with an itemized deduction cap) will decrease the tax benefit of a charitable deduction, possibly reducing the overall level of charitable giving by individuals.

In addition to potentially facing an overall reduction in charitable giving, the tax-exempt sector may also feel the impact of other changes to the tax code.  For example, proposals to limit government spending could result in cuts to programs that fund services carried out by tax-exempt organizations.  Funding cuts without a reduction in demand for services may lead to further financial pressure on the tax-exempt organizations dependent on these federal grants.

As tax changes develop throughout the coming year, Gelman, Rosenberg & Freedman will keep clients apprised of changes that may affect the tax-exempt community. For more information, contact Dick Locastro at dlocastro@grfcpa.com or 301-951-9090.

Richard J. Locastro, CPA, JD

Partner and Director, Nonprofit Tax