By Ellen Israelson, VP of Philanthropic Service, JCF

In its present form, the proposed changes in the tax code are a mixed bag for the not-for-profit sector. First, the potentially good news for philanthropy is that both bills maintain the charitable deduction. In fact if passed, it will increase the limit on the charitable deduction (on gifts of cash) from 50% to 60% of AGI.  In addition, the Pease Limitation on itemized deductions would be repealed. This would remove the cap on the total amount of itemized deductions that upper income taxpayers would be allowed to claim. There is also some limited optimism that the proposals, which would also lower tax rates for some Americans, could in turn generate more donations to charity, since they may have more disposable income. This positive news should assuage the fears about the negative impact on the charitable deduction.

A few key favorable provisions for charitable giving currently in both the House and Senate bills:

  • Preserve existing charitable contribution deduction as one of only three itemized deductions
  • Increase adjusted gross income limit on annual charitable deduction from 50 to 60 percent
  • Repeal the Pease amendment eliminating the limitation on itemized deductions for high-income individuals

The areas that may cause concern, however, are the increase in the standard deduction (which would result in fewer people itemizing and thus able to utilize the charitable contribution deduction) and the changes to the marginal income tax brackets, which some experts believe will lead to a decrease in charitable giving. The other provision that may negatively impact nonprofits is the move to repeal the deduction for state and local income taxes and property taxes. The House would preserve a limited (up to $10,000) deduction for real property taxes. The Senate would repeal the state and local tax deduction in full, leaving people in high-tax states like New York with fewer dollars for charitable donations. Limiting the deduction on mortgage interest payments could also limit people’s ability to make charitable donations.

Yet another concern for charities is the doubling of the estate tax exemption (currently $5.49 million for individuals and $10.98 million for couples).  Planned giving professionals fear this will lead to a significant decline in bequests to charities. Recent studies on the impact of the plan vary, but they tend to paint a dim picture. The Tax Policy Center estimates that the proposed changes could decrease charitable giving by $16-$24 billion over the course of a year, and the Lilly Family School of Philanthropy at the University of Indiana projects a loss of more than $13 billion.  Other concerns include the repeal of the disability access tax credit and the 1.4 percent endowment excise tax that would make it harder for private colleges and universities to build their endowments and ensure their futures.

Another change in the House bill that affects the sector is the change to the tax rate imposed on the investment income of private foundations to a flat 1.4 percent. Currently, it is a two-tiered rate of 1% or 2%. In addition, the House bill proposes that foundations acquiring or holding art open their exhibitions to the public for at least 1,000 hours annually.  Donor advised funds would be required to disclose the average aggregate amount of grants they make, as well as maintain a policy regarding fund inactivity. Jewish Communal Fund has always reported its aggregate grant-making in its Annual Report—we are proud to have distributed 26 percent of assets in FY 2017. And JCF has just released its first detailed Giving Report, which can be accessed at jcfny.org/givingreport17. (Information on JCF’s fund inactivity policy can be found in our Policy Guide.)

One other potential change for advisors to be aware of is a provision proposed in the Senate bill (but not included in the House bill) that would require investors to use first in, first out (FIFO) accounting for tax lots when calculating capital gains taxes. Currently, taxpayers can chose which lots they have disposed of, so if a taxpayer has purchased a certain stock over time, they can chose either the low basis or high basis lots when they transfer a portion of the stock.  If you are making a gift of appreciated stock to charity, you would likely want to donate the low basis stock and retain the high basis stock (so that your capital gain is lower when you sell this lot).  This may no longer be possible under the Senate bill.  With this in mind and the market at all-time highs, 2017 is an especially good year for making a contribution of highly appreciated securities.