Charitable Giving and Effect of New Tax Laws
There are two versions of the Tax Cuts and Jobs Act, and while the house and senate hammer out their respective bills' differences, you can begin to prepare for the effect on charitable giving through tax law changes.
First, donations are tax deductible only when made to "qualified organizations" and only when included on Form A's list of itemized deductions of a 1040 return. For 1040 filers, they have the choice of taking a standard deduction or itemizing deductions. Under the proposed tax changed, the standard deduction is doubling to $12,000 for single filers and $24,000 for married taxpayers filing jointly. The higher threshold will allow many more filers to take the standard deduction, and since charitable donations are only deductible as part of itemized deductions, their tax deductibility is lost. This can impact the level of charitable gifts made to your organization.
The bill is also expected to reduce marginal tax rates either through a reduction in the tax rate or an increase in the income thresholds for tax rates. Reduced tax rates disincentivize giving because there is a greater cost of giving. A 39% tax rate saves 39 cents for every dollar given, but when that drops with a lower rate, the reward is seen as less significant or more costly.
Major changes in estate taxes -- taxes imposed on assets inherited upon death -- include a dramatic reduction of or complete repeal of estate tax rate. A study by the Tax Policy Center concluded that a full repeal would reduce giving by 15%. Reductions in the estate taxes are expected to have the same negative effect as both the increase in the standard deduction and the marginal tax rate drop.
Further compounding the decision making process is how gifts from investments are treated. This year has seen some significant stock market returns. Traditionally, tax laws allowed donors to select which stocks are being donated. So, if stocks were purchased separately at $20 and $40 per share, donors could donate those purchased at the lower share price and avoid future capital gains when selling the higher share value stocks later. New tax laws propose a "first in, first out" method meaning the oldest shares are donated first.
On the flip side, there are two pieces of the bill that could have a positive effect on giving. The first is an increase in the amount donated in itemized deductions, and the second increases the total amount donated as a percentage of gross income. So, there are opportunities on the horizon for high income earners.
This is a good time to visit your donor base and share the legislation's effect on their taxes. Monthly givers might choose to pay annually before the end of the tax year to maximize deductions. And those in tax brackets that will see a reduction in taxes may choose to make charitable gifts this year while at the higher level.
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