Four Ways Charitable Giving Could Change With a Tax Overhaul

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By Colleen Murphy

Dec. 9 — Debate over international and corporate tax is at the center of conversations about impending tax law changes—but the overhaul that lawmakers are promising could also have a sweeping impact on charitable giving.

“Every once in a while you have your big moment. Whether it’s tax policy as it relates to philanthropy or any tax policy, this is the big moment if tax policy is what you work on,” said Hadar Susskind, senior vice president of government relations at the Council on Foundations in Washington.

Possible changes, such as capping tax deductions or lowering the individual tax rates, may deter individuals from making donations and upend the existing charitable giving structure, practitioners and industry specialists focusing on charitable law told Bloomberg BNA. Already some individuals may be making more donations this year, in advance of possible lower tax rates in the future—and that’s just one way taxes will impact philanthropy, they said.

Here are four scenarios that could occur under a tax revamp:

Altering Charitable Giving Deduction

Individuals currently can claim tax deductions for making donations to certain charitable organizations—generally up to 50 percent of adjusted gross income. Altering or removing the charitable giving deduction is a possibility under broader tax changes, which would slow charitable giving, practitioners said.

“We have heard directly from congressional offices that, while they clearly support the charitable deduction, and they would never have any intention of doing anything that would weaken that benefit, it along with basically everything else—since this is really a once-in-a-generation moment—is on the table,” Susskind said.

However, the deduction is one of just two that will remain in place, according to the GOP tax overhaul blueprint lawmakers released in June. Though the plan is meant to give a high-level look at Republican ideas, and isn’t as detailed as actual legislation, it still serves as an indicator of priorities now that Republicans continue to control the House and Senate.

The House Ways and Means Committee “will develop options to ensure the tax code continues to encourage donations, while simplifying compliance and record-keeping and making the tax benefit effective and efficient,” according to the blueprint.

Rep. George Holding (R-N.C.), a member of Ways and Means, told Bloomberg BNA Dec. 8 lawmakers remain undecided on capping the charitable giving deduction, as all elements of the blueprint are still being discussed. President-elect Donald Trump hasn’t made public comments recently about his stance on the deduction. His transition team didn’t return a request for comment.

Capping Itemized Deductions

Trump has proposed capping itemized deductions to keep single individuals from subtracting more than $100,000, and couples from subtracting more than $200,000, from their tax bills. While few taxpayers choose to itemize their deductions—which requires listing details such as mortgage interest and medical expenses on a tax form—placing a cap could discourage giving and decrease the number of large donations, practitioners said.

“I just feel like a lot of my clients are interested in and focused on how their gift is going to be impacted by deductions,” said Morey Ward, counsel at Ropes and Gray LLP in Washington. Ward focuses on tax-exempt organizations and was legislative counsel for the Joint Committee on Taxation from 1998 to 2000, where she advised lawmakers and their staff members on charitable giving.

Six- or seven-figure donations may “diminish to a certain extent” if the deduction is reined in, harming charities that rely on those gifts as part of fundraising campaigns, said Clifford Perlman, a partner at Perlman and Perlman LLP in New York, a law firm that specializes in nonprofits.

About one-third of taxpayers choose to itemize their deductions, with the majority instead claiming the standard deduction, according to the Tax Foundation. The standard deduction for an individual in 2016 is $9,300.

Lowering Tax Rates

Trump has promised a “massive tax reduction” for working class and middle-income Americans. Under the blueprint and Trump’s plan, the seven-bracket system will be cut to three brackets, with a top individual income tax rate of 33 percent.

Lower tax rates may also decrease the motivation to itemize deductions or make donations in the first place, practitioners said.

“If the tax rates are lower overall, then basically any kind of itemized deductions may have less of an impact,” said Jeffrey S. Tenenbaum, a partner and the chair of the nonprofit organizations practice group at Venable LLP in Washington.

Lower rates may spur charitable giving this year as individuals try to load up on deductions and decrease their tax burden, said Richard J. Locastro, a nonprofit tax partner at Gelman, Rosenberg & Freedman CPAs in Washington. Contributions into donor-advised funds may also increase because individuals will “still have some control over it potentially and it doesn’t have to be distributed out right away,” he said.

Revamping Existing Rules

Creating charitable giving accounts, simplifying the excise tax on private foundations and allowing the rollover of individual retirement accounts to donor-advised funds could also be wrapped into broader changes, Susskind said.

Holding introduced a bill ( H.R.4907) in April to exclude from the gross income of individuals above the age of 70 up to $100,000 in distributions from an IRA to a donor-advised fund. The bill was referred to Ways and Means.

“There are a lot of different ideas and opportunities like that that could be part of this,” Susskind said.

With assistance from Aaron E. Lorenzo and Kaustuv Basu in Washington.

To contact the reporter on this story: Colleen Murphy in Washington at cmurphy@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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