There has been a lot of coverage about the new tax law and its implications on the economy, on businesses and individuals, and on estate plans.
There have also been some valuable webinars and articles on how the new law will affect charitable giving. Some coverage has been alarmist, and most articles are far from succinct and readily useful for fundraisers. Judging by the questions I often get, there remains much confusion by donors and advancement officers.
Allow me to take a run at providing, what I think are the most relevant aspects of the new tax law for advancement officers, that you may find useful for strategy and to help donors understand the implications for their philanthropy planning.
Top tax rate.
BEFORE 2018: 39.6 %
2018 AND BEYOND: 37%
Implications: Since 2.6% of a donor’s income at the highest tier will not be subject to tax, the donor will have more disposable income, and perhaps will make larger or more gifts. On the flip side, the amount they can deduct is 6.5% less. So, on a gift of $100,000, it will “cost” the donor $6,500 more in unrealized tax benefit compared to 2017.
% of tax filers who itemize.
BEFORE 2018: 30%
2018 AND BEYOND: 10%
Implications: Roughly 30 million more filers will take the standard deduction which has doubled under the new law from $6,000 to $12,000 for an individual filer and $12,000 to $24,000 for a married couple. As a result, these 30 million filers will not deduct their charitable contributions. The good news is that for smaller dollar donors, tax implications rarely figure into their giving, and under the new law, the higher standard deduction will likely put more money into their pocket.
Most likely to itemize.
BEFORE 2018: Married Couples
2018 AND BEYOND: Singles
Implications: For larger giving, single people itemizers can realize greater tax benefit than married couples.
Portion of all giving from itemizers.
BEFORE 2018: 80%
2018 AND BEYOND: 50%
Implications: While only 10% of tax payers will be itemizing, it is anticipated that half of all giving will come from them. Which means they are giving the large gifts.
Adjusted Gross Income against which deductions can be made in a year.
BEFORE 2018: 50%
2018 AND BEYOND: 60%
Implications: This may seem like a small difference, but it is estimated that $34B in gifts are deducted for gifts made in prior years. Meaning, for a gift of say $1M made by someone with income of $1M: in 2017 they can deduct $500,000 of the gift which is half of their income. If this gift happened in 2018, they could deduct $600,000, a 20% additional tax benefit. This benefit is greatest for people 65+.
Cap on deduction of mortgage interest – principal size.
BEFORE 2018: $1,000,000
2018 AND BEYOND: $750,000
Implications: Donors who live in highly valued homes with a hefty mortgage will be paying more tax. This is most significant for large metropolitan areas where home values are highest.
Owners of multiple homes.
BEFORE 2018: All prop. tax
2018 AND BEYOND: $10,000 limit
Implications: This will represent a much larger tax liability change and may prompt the sale of some extra homes. It can also prompt the gifting of an extra home, so be heads up if you have donors in this situation.
State & local taxes deductions.
BEFORE 2018: no limit
2018 AND BEYOND: $10,000 limit
Implications: This will represent a much larger tax liability change for people who live in states with high income taxes and/or have high property taxes.
Estate tax: amount exemption from taxation.
BEFORE 2018: $5.6M/person; $11.2M/married couple
2018 AND BEYOND: $11.18/person; $22.36M/married couple
Implications: This is likely to have a significant negative affect on estate plans and charitable gifts through estates. The use of charitable gifts to shelter assets from federal estate tax will be far less an issue. It is estimated that only 0.1% of estates will now owe federal estate tax. In addition, 65% of people live in states with no estate tax.
There were no changes in the following core elements of the tax code:
- Charitable income tax deduction is still available for those who itemize.
- Long-term capital gains tax (20% on appreciated assets less than $1M held for more than 1 year ). Implications: It is now more attractive to give gifts of appreciated assets because state capital gains tax is no longer deductible beyond the $10,000 tax limit.
- IRA rollover gifts for those over 70 ½; still get tax benefits without needing to itemize.
- Split interest gifts (charitable gift annuities, CRUT, lead trusts).
What to Expect in 2018
The experts say (not me) to expect overall giving to decline 2-5% in 2018. Historically, giving has always declined the year after a major tax law change. Many donors doubled up gifts in 2017, so 2018 will be softer. Your budgeting forecasts should adjust accordingly.