Over the past several months, you have probably read all the headlines about U.S. tax reforms. In June 2016, House Republicans released their tax reform blueprint, while in late April 2017, President Donald Trump unveiled a broad outline to overhaul the U.S. tax code. While nothing has been set in stone, these proposals have raised some questions, especially regarding charitable contributions.
Can tax plans affect how taxpayers donate to charity? Let’s look at some of the ways tax reform could reduce incentives for charitable giving.
Increase of the Standard Deduction and Reduction of Itemized Deductions
Current estimations from The Urban Institute state that 82 percent of total charitable giving ($239 billion) comes from itemizers, while the other 18 percent ($53 billion) is provided by nonitemizers. Under the president’s plan and the GOP blueprint, the standard deduction would be doubled, while all itemized deductions would be eliminated except for home ownership, retirement savings, and charitable donations. Therefore, this might discourage charitable giving.
Would these changes steer regular itemizers away from donating to charity? Most Americans – roughly 70 percent – already choose the standard deduction over itemizing deductions because of its simplicity and better return rate. If the standard deduction is doubled and most itemized deductions are eliminated, taxpayers may not see a reason for itemizing deductions at all.
Downsize of Tax Brackets
Both Trump’s plan and the GOP blueprint intend to cut the current seven tax brackets down to three – 10, 25, and 35 percent for Trump’s proposal and 12, 25, and 33 percent for the GOP blueprint. There could be a drop in charitable giving because, generally, the lower the tax rate, the lower the deduction for charitable contributions. For example, if you were itemizing taxes with a tax rate of 39.6 percent – the highest tax rate currently – and donated $50,000 to charity, your estimated tax savings would be $9,900. If the highest tax rate dropped as low as 33 percent, your savings would unfortunately drop to $8,250.
Cap on Total Itemized Deductions
When Trump was a presidential candidate, he proposed an overall cap on itemized deductions – $100,000 for single filers and $200,000 for joint filers. Former President Barack Obama even attempted to establish a 28 percent limit on itemized deductions for individuals earning more than $200,000 and couples earning more than $250,000. If higher-income taxpayers have home mortgage interest and property taxes surpassing these caps, they would most likely prioritize these deductions over charitable contributions.
Elimination of the Estate Tax
Estate tax – sometimes referred to as inheritance tax or death tax – is a tax on the value of a deceased person’s estate (cash, property, other assets) before distribution to an heir. This tax is mainly imposed on the wealthy, since as of 2017, an individual can leave $5.45 million to an heir without any taxation. If an estate surpasses that threshold, the Internal Revenue Service taxes 40 percent. For example, if a deceased individual’s estate was worth $100 million, the IRS would tax 40 percent of $94,550,000. The IRS would receive $37,820,000 and the heir would be left with $62,180,000.
In relation to charitable contributions, estate taxes matter because if a decedent leaves assets to a qualifying charity, the estate would receive a tax deduction. Trump’s proposal and the GOP blueprint call for an elimination of estate taxes. If this happens, an estate tax repeal could drop charitable contributions between 22 and 37 percent according to a study.
Would you donate less if these tax reforms are enacted? Let us know in the comments section below.
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