January 12, 2017
With a new administration about to take 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 to organizations. This may also result in less money going into donor-advised funds (DAFs) and private foundations (PFs). Currently, donors may generally get 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 get the deduction in the current year. The money will not ultimately 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 of less benefit.
- Lower tax rates: One change that is expected to come with tax reform 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 these potential changes which may lead to lower charitable giving, the tax-exempt sector may also be impacted by other changes. 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 decrease in the demand for services may lead to further financial pressure on the tax-exempt organizations dependent on these federal funds.