The 100-year-old charitable tax deduction is in danger . Charities are gearing up to fight fast-track tax reform legislation in Congress that could decimate giving and cut the number of Americans who can claim the charitable tax deduction by 80% to just one out of 20 taxpayers. Under President Donald Trump’s tax plan and the House Republican Blueprint—starting points for 2017 tax reform—charities face two big threats: curtailed income tax incentives for charitable giving and estate tax repeal. “It’s by far the greatest threat to tax-encouraged charitable gifts that I’ve seen in over half a century,” says Conrad Teitell, a tax lawyer and editor of Taxwise Giving. “It would be a double whammy.”
The charitable tax deduction would still be part of the tax code—that way politicians can say they preserved it—but way fewer taxpayers would get to claim it. The House Blueprint would reduce the percentage of American taxpayers who take the charitable deduction from 25% (one out of four taxpayers) to 5% (one out of 20). For the remaining 5%, a 2% of adjusted gross income floor would apply. (In 2014, the charitable contributions deduction was claimed by 36.2 million households, according to the Tax Foundation.)
Separately, there’s Trump’s proposed cap on total itemized deductions, including the charitable deduction, at $100,000 for single filers and $200,000 for joint filers. Also on the table: limiting benefits for some appreciated property gifts, imposing capital gains taxes on appreciated property bequest to private foundations, and requiring payouts from donor-advised funds.
“Given the proposals we’ve seen, we’re quite concerned,” says Dan Cardinali, president and ceo of Independent Sector, which lobbies on behalf of charities. “Our institutional focus is bulls eye insuring that the charitable tax deduction is preserved, and on the offensive, increasing the number of Americans who can claim it.”
If donors lose tax breaks for gifts to charity, will they be as generous? People are motivated by the tax law. If capital gains rates go down, charities get fewer gifts of appreciated property, for example. Trump’s plan would reduce individual giving by 4.5% to 9%, or between $13.5 billion and $26.1 billion in 2017, according to the Tax Policy Center here. Separately, estate tax repeal would decrease donations to charity by 6% to 12%, the Congressional Budget Office estimated here. (See Will Trump Victory Yield Estate Tax Repeal?)
The House Blueprint says that unleashing economic growth will promote charitable giving. “We’re looking at ways to unlock more charitable giving,” Ways and Means Chairman Kevin Brady (R-TX) said last week at a Financial Services Roundtable discussion on tax reform.
There’s recent precedent for expanding charitable tax breaks. Just last December, Congress passed a law that made permanent incentives that were part of the on-again-off-again temporary tax extenders. Taxpayers over age 70 ½ can make tax efficient direct donations of up to $100,000 from Individual Retirement Accounts, and not have to report the IRA distributions as taxable income on their 1040 (See Charitable Tax Trick). In addition, food inventory donations rules were expanded, and ceilings on the deductibility of conservation easements were raised.
Teitell says it’s key to let legislators know now if you want to preserve these charity tax breaks, and others like charitable trusts and gift annuities. And why not ask for more? His baby: The Legacy IRA that would allow tax-free IRA rollovers of up to $400,000 a year for gifts to life income plans. “That becomes even more important if the charitable deduction is limited and would open up charitable giving to a new group of taxpayers,” he says.
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