Tax law has long been a powerful way for government to influence behavior. Since Congress introduced the charitable deduction 100 years ago, one of those encouraged behaviors was charitable giving. But tax plans on the table right now could severely curtail the incentives for such donations and therefore put many charities around the country and in South Florida at risk.
There are several potential changes that could negatively affect charitable giving, from income tax to estate tax.
Income tax changes: One of the biggest potential changes is the proposed cap on itemized deductions included in President Donald Trump’s tax plan. Under the plan, total itemized deductions, including charitable contributions, would be limited to $100,000 for single taxpayers and $200,000 for married taxpayers filing jointly, which removes a big incentive for high-net-worth taxpayers to make large donations to nonprofits.
At the same time, the standard deduction would increase significantly under the Trump plan, which means many middle-income Americans would no longer need to itemize deductions and therefore may be less likely to spend on charitable giving. Overall, the Tax Policy Center estimates “Trump’s plan would reduce individual giving by 4.5 percent to 9 percent, or between $13.5 billion and $26.1 billion in 2017.”
The House Republican Blueprint, which will likely be the starting point for drafting tax reform legislation in the House of Representatives, would eliminate all itemized deductions — except charitable giving and the mortgage interest deduction. However, far fewer taxpayers (as few as 5 percent by some estimates) would be able to claim the charitable deduction under the Blueprint.
Estate tax repeal: Trump’s tax plan includes a full repeal of the estate tax, which is likely to result in less money from estates going to charities.
While there are many different ways to structure an estate plan, depending on an individual’s goals and circumstances, it comes down to two basic choices: leaving assets to heirs (or other individuals) or leaving assets to charity. My experience helping clients plan their estates for over 40 years has shown that the tax benefits surrounding charitable giving help to make it an easier decision for individuals to include charities as beneficiaries.
Currently at 40 percent, the estate tax encourages individuals to consider leaving their assets to nonprofit organizations and avoid paying the tax, rather than pass it all to their heirs and have the value of their estate be diluted by taxes. If the estate tax is repealed, a major incentive for giving will be gone.
Impact on charities: Ruth Shack, a philanthropic leader, civil rights champion and three-term Miami-Dade county commissioner, recognizes the potential impact that planned tax reform could have on local nonprofits.
Shack, who led the Dade Community Foundation (now The Miami Foundation) for decades, reminds us of the three sectors of a civil society: business, government and civic organizations, including charities.
“Government endorses the third sector by supporting the charitable deduction,” she said. It has been proven that while individuals are charitable by nature, the magnitude of their generosity is tied to their tax deduction, which supports the ‘safety net’ of the third sector.”
Total charitable giving in the U.S. reached a record $373.25 billion in 2015, according to “Giving USA 2016: The Annual Report on Philanthropy.” As you might expect, it’s not big foundations or corporations who are leading that generosity, it’s the public. Accounting for more than 70 percent of total giving, individual donors are the life force of charities.
Other than during the recession of the late 2000s, charitable giving in the U.S. has generally been on an upward trend over the past 30 years. However, that trend could quickly come to an end or even reverse if the tax changes outlined above are implemented as planned.
And South Florida may be in worse shape than most. Ranking at 44th out of 50 states, Florida is already among the least charitable states, according to a 2016 study by WalletHub. What will happen to local nonprofits if residents feel even less motivated to give?
John R. Anzivino, CPA, is a principal in charge of the estate, trust and exempt organization practice of Kaufman Rossin, one of the Top 50 CPA and advisory firms in the U.S, where he offers sophisticated high-net-worth clients with estate planning and tax needs. He is the founding president and co-founder of the Partnership for Philanthropic Planning of Miami-Dade and is a member of the Partnership for Philanthropic Planning (formerly known as the Planned Giving Council). firstname.lastname@example.org.
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