News you can use: How President Trump’s tax plan may impact charitable giving for Americans
On April 26th, 2017, President Donald Trump released his tax reform proposal entitled “2017 Tax Reform for Economic Growth and American Jobs.” The proposal provides a series of bullet points aimed at the President’s four stated goals: i) growing the US economy and creating jobs, ii) simplifying the tax code, iii) providing tax-relief, and iv) lowering the business tax rate.
Of course, we are far from seeing actual changes to the US Tax Code. Additional details on the proposal and how it will be paid for through offsetting cuts or alternative sources of revenue are needed from the White House. Review, response, and alternative strategies are certain to arise from the press, the public, and politicians. And only once it is in a final form can both houses of Congress vote on passage of the proposal.
That being said, the plan is a preview of the debate we’re about to have as a nation – a debate that may affect Americans’ philanthropic decisions. While the plan would “protect” the tax deduction for charitable gifts, other points could reduce tax-incentives for charitable giving.
1. Doubling the standard deduction. When filling-out their tax returns this year, married couples, for example, could claim a standard deduction of $12,700. If Mr. Trump’s plan becomes law, that couple could claim a standard deduction $25,400 going forward (possibly adjusted for inflation). As a result of this change, many more taxpayers would choose to claim the standard deduction instead of itemizing deductions, thereby removing the incentive of the itemized charitable deduction.
However, presumably the plan retains another tax benefit for charitable giving, even for donors who claim the standard deduction – avoidance of capital gain taxes on appreciated assets donated to a charity. When a taxpayer contributes to charity an investment asset (such as stock or mutual funds) held longer than one year, the donor does not recognize the capital gains tax on the gain inherent in that asset. For example, if a donor purchased a share of Apple stock for $100 a several years ago, and donated it to Duke today at a share price of $140, that donor would not owe tax on that $40 of gain. Duke would sell that stock and, because Duke is a tax exempt entity, it would not pay tax on that gain either. The plan released by the White House is silent on this technique.
2. Reducing the number of tax brackets from seven, with the highest rate at 39.6%, to just three tax brackets, with a top rate of 35%. When income tax rates are lower, the economic benefit of a charitable deduction decreases. For example, if a taxpayer who pays a top marginal tax rate of 39.6% makes a charitable gift of $100, she would save $39.60 in taxes by claiming that gift as a deduction ($100 of taxable income x 39.6% in tax avoidance = $39.60 in tax savings). If that taxpayer pays a top marginal rate of 35%, however, she saves only $35 in taxes by making that same gift.
Currently, the federal income tax rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The plan proposes tax brackets of 10%, 15% and 35%.
Though the plan lowers the tax rate for taxpayers currently in the 39.6% bracket, it does not indicate what the income levels for the new brackets will be; as a result, it’s unclear which taxpayers would be in a higher or lower bracket than they are currently. For example, someone currently in a 28% bracket (which would disappear if the plan goes into effect) could find herself in the new 15% bracket; alternatively, her level of income may put her in the new 35% bracket. Because a taxpayer’s bracket determines the value of the charitable deduction to that taxpayer, we will need more information about the new brackets to see how this philanthropic incentive shakes out.
3. Eliminating the estate tax. Currently, taxpayers can make gifts to friends and family during their lifetime, or at death, up to a total amount of $5,490,000 without owing gift or estate tax; at death, assets passing to heirs above that amount (as reduced by lifetime gifts) may be subject to a federal estate tax of 40% (though there are many exceptions and planning techniques to reduce that liability). Due to the charitable estate tax exemption, high net worth Americans often incorporate charitable gifts into their planning. If Mr. Trump’s plan becomes law, there would be no estate tax incentive to leave estate gifts to charity.
Whatever changes take place in the US Tax Code, the effect they would have on philanthropy in the US is difficult to determine. Americans make charitable gifts for a wide variety of reasons. In my experience in nonprofit fundraising over the past two decades–and I bet most of my colleagues would agree with me on this–Americans support charity primarily because they want to have a positive impact in the world and want connect with something that is bigger than themselves. Many donors who support Duke, for example, are thankful for the financial aid they received as a student, or they are inspired by cutting-edge research being performed on campus, or they have received world-class medical care here. In addition, our country has the most well-developed culture of philanthropy in the world. That won’t change. In fact, many advocates of tax reform argue that reducing taxes would make Americans more likely to make charitable gifts; with a lower tax burden, Americans would have more money left in their pockets, and thus they’d feel more comfortable giving that money to charity.
Duke’s Office of Gift Planning will be following closely the tax reform debate and its impact on philanthropy at Duke and more broadly. In addition, Duke’s Office of Government Relations engages lawmakers on these issues and others, working on Duke’s behalf to explore solutions that assure our continuing ability to be an international leader in education, teaching and research.
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