With President-Elect Donald Trump preparing to enter the White House, and with Republican majorities in both houses of Congress, we can expect a robust discussion regarding changes to the Internal Revenue Code (a.k.a. taxes) in the year ahead. Many of the details being discussed would affect the tax benefits currently available for charitable giving. I’ve summarized some of the tax proposals – and how they might affect philanthropic planning – here.
1. Mr. Trump’s Tax Plan
As a presidential candidate, Mr. Trump set-forth a plan that would limit a taxpayer’s total itemized deductions (including the charitable deduction) to $100,000 for an individual, $200,000 for married couples. As a result, taxpayers with significant deductions for mortgage interest and state income taxes, for example, may not get a chance to claim deductions for charitable giving.
Many more taxpayers are likely to be affected by a second prong of the Trump plan, which would increase the standard deduction from $6,300 to $15,000 for individuals, and from $12,600 to $30,000 for married couples. If this change takes effect, many folks who currently itemize their deductions would opt for taking a standard deduction instead; because they would no longer itemize deductions, they would not receive any tax benefit for charitable gifts.
Finally, Mr. Trump has proposed a change in federal income tax rates. This is important for charitable giving because, when a taxpayer claims an income tax deduction, she is reducing her tax burden at her highest marginal tax rate. For example, in theory, if a taxpayer currently has a top marginal tax rate of 39.6% and she donates $1,000, she is saving taxes in an amount of $396 ($1,000 x 39.6%). If her top rate goes down to 33%, as provided by Mr. Trump’s plan, her tax savings for that same gift are reduced to $330.
2. Paul Ryan’s Tax Plan
In June 2016, House Speaker Paul Ryan endorsed a tax plan that would also reduce the highest federal tax rate to 33%. Similar to Mr. Trump’s plan, it would increase the standard deduction, though not as much, to $12,000 for single individuals and $24,000 for married couples. While the “Ryan Plan” eliminates most deductions altogether, it saves the charitable deduction (as well as the mortgage interest deduction) and does not cap all deductions as Mr. Trump’s plan does.
3. The Federal Estate Tax
The headlines of 2017 are also very likely to mention the estate tax. The plans of both Mr. Trump and Mr. Ryan would eliminate the estate tax entirely. While there may be other changes that would make this a less-sunny picture for wealthy tax-payers eliminating the estate tax would likely reduce the tax benefits of charitable gifts made through estate plans.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.
