One change that Trump has proposed is to increase the standard deduction. This would reduce the amount of people who would itemize, thereby reducing the amount of people who would receive a tax benefit from making charitable contributions.
Taxpayers who were itemizing and fell just above the current standard deduction ($6,350 for single filers and $12,700 for those filing jointly) received a tax benefit for every additional dollar they donated. Under the proposed plan, these taxpayers would instead claim the standard deduction of $15,000 for single filers and $30,000 for joint filers. They would need to donate an additional $8,650 if filing single or $17,300 if filing jointly to even begin receiving a tax benefit for donating. This is likely to impact the charitable giving by those who were above the standard deduction last year and would be below it under Trumps plan.
Another proposed change is to limit itemized deductions to $200,000 for married couples filing jointly and $100,000 for single filers. In addition it is unclear if some major deductions will be eliminated. For instance, the deduction for state taxes could go away in addition to imposition of this overall cap on deductions.
The combined impact of these changes on individual charitable giving is a bit convoluted. Donors who generally give more than the proposed limit may reduce their donations to fall below the cap. However without the state tax deduction, high income taxpayers may be faced with the decision to make charitable contributions to maximize their deduction, or to pay tax on a lot more income than they have in the past.
Individual Tax Rates
Trump’s plan also proposes a decreased individual income tax rate. There are two ways to interpret the effect of this change. One interpretation is that this would free up individual taxpayers’ cash, creating more opportunities for charitable giving. The elimination of an estate tax could also have this result. However, the after tax benefits of charitable giving are diminished as the tax rate decreases. $1,000 donated in an environment where it was taxed at 40% results in a tax savings of $400 and an after tax cost of only $600. $1,000 donated in an environment where it is taxed at 33% results in a tax saving of $330 and an after tax cost of $670.
Corporate Tax Rate
Keep in mind that nonprofit organizations that are recognized as tax exempt must still pay tax on their unrelated business income. Trump’s plan proposes a decreased corporate tax rate of 15% that presumable would apply to nonprofit unrelated business income. The potential for this reduced rate may impact your nonprofit’s business decisions regarding unrelated activities.
Holding or Folding
So what is your Trump card? Do you anticipate donors to accelerate their giving before the end of the year due to potential itemized deduction limits or increased after tax costs? Your year-end donation campaign could include messages surrounding the potential tax benefits of accelerating planned 2017 contributions into 2016. Do you anticipate the elimination of other major deductions or additional available cash due to lower tax rates to actually increase future donations? Patience may be your focus as we watch the New Year unfold. Do you expect to see little change to occur during 2017? Stay the course and keep a watchful eye on 2018.
If you have any questions about the above please call your tax professional at (858) 558-9200.