Final Version of the Tax Cuts and Jobs Act: H.R. 1, or The Tax Cuts and Jobs, act was officially signed into law by President Trump on December 22, 2017. This follows both the House and Senate passing the final legislative text of the bill on December 20, 2017, as it was released by the Conference Committee. The majority of the bill went into effect on January 1, 2018.
The final version of the bill includes several provisions important to the charitable sector:
- Doubled standard deduction to $12,000 for individuals and $24,000 for marrieds until 2025
- Increased AGI limits to 60 percent for cash contributions to public charities and certain private foundations
- Repeal of Pease limitation until 2025
- Doubled estate tax exemption to $10 million until 2025
- 1.4 percent excise tax on private college and university investment income if assets are valued of at least $500,000 per full-time student
- 21-percent excise tax on tax-exempt executive compensation over $1 million
- Repeal of exception to the substantiation requirement for gifts over $250 when the donor organization reports the gift; effectively requires all donors to substantiate gifts over $250
Notably, several provisions from the House’s original bill were not included:
- Streamlined private foundation excise tax
- Temporary repeal of the Johnson Amendment
- Reporting requirements for DAF sponsoring organizations
- Estate and gift tax repeal after 6 years
- Adjusted charitable mileage rate for inflation
Universal Charitable Giving Act: In October 2017, Rep. Mark Walker (R-NC) introduced the Universal Charitable Giving Act of 2017 in the House of Representatives. The bill would extend the charitable to non-itemizers, often referred to as a universal charitable deduction, which would be capped at one-third of the standard deduction. The legislation would also preserve the current charitable deduction for those who itemize. On November 14, Senator James Lankford (R-OK) introduced the Senate companion to the Universal Charitable Giving Act. Charities have rallied behind a universal charitable deduction as a potential solution to the drop in giving that will result from a doubled standard deduction.
Tax Cuts and Jobs Act: In October 2017, House and Senate Republicans formally unveiled their respective versions of tax reform legislation called the Tax Cuts and Jobs Act. On November 16, the Senate Finance Committee completed a four-day markup of the Tax Cuts and Jobs Act, and advanced the bill on a party-line vote to be considered by the full Senate. In the House, members passed their version of the bill on November 16 with a vote of 227-205. Of note, both versions include the provision from the House Republican Blueprint that would double the standard deduction, reducing the number of individuals who would itemize to around 5 percent of Americans. This would cause a significant drop in charitable giving. See below for a brief overview of the similarities and differences in the two bills as they relate to the nonprofit sector:
Both the Senate and House bills have some of the same provisions:
- Doubled standard deduction and preservation of the charitable deduction
- Increases AGI limits for the charitable deduction for cash gifts from 50 percent to 60 percent. (Senate sunset after 12/31/2025)
- Elimination of the Pease limitation. (Senate sunset after 12/31/2025)
- A 1.4 percent excise tax on investment income of private colleges and universities, and organizations formally related to the institution, with assets valued of at least $250,000 per full-time student.
- Doubled estate tax and generation-skipping tax exemption to $10 million. (Senate sunset after 12/31/2025)
- A 20 percent excise tax on executive compensation over $1 million at tax-exempt organizations.
There are also some key differences. The House version also includes:
- Streamlined private foundation excise tax to 1.4 percent.
- Requirement that donor-advised fund sponsoring organizations disclose inactive fund policies, as well as average amount of grants made from their DAFs.
- Estate tax and generation-skipping tax repeal after six years.
- Repeal of the Johnson Amendment, effectively allowing all 501(c)(3) organizations to engage in political speech in the ordinary course of the organization’s business. (Sunset after five years)
House Republican Blueprint: In July 2016, Speaker of the House Paul Ryan (R-WI) and Ways and Means Chairman Kevin Brady (R-TX) released a tax reform blueprint aimed at simplifying the tax code. The big picture is that the blueprint reduces the current seven rates of taxes for individuals to three rates: a top rate of 33 percent, followed by 25 percent and 12 percent. It reduces the corporate rate to 20 percent and creates a separate top rate of 25 percent on income from small businesses. The blueprint also eliminates all tax benefits, except for charitable giving and home mortgage interest.
The blueprint expands the standard deduction for taxpayers, something that will greatly simplify tax filings for a whole lot of people. In doing so, the blueprint aims to “reduce the number of taxpayers who itemize their deductions from about one-third under current law to approximately 5 percent under our simpler, fairer, and flatter tax system.” Simplifying tax preparation makes sense. However, if the number of taxpayers who itemize goes from one-third to 5 percent, we worry that the 28 percent that no longer itemize will rethink the size and timing of their gifts. Even if the structure of the charitable deduction does not change, the number of people who give more—at least in part because of the deduction—will change.
President Trump Tax Reform Plan: In September 2016, Donald Trump released an updated tax reform proposal that, in contrast to his first proposal, would significantly cap the charitable deduction. Trump’s first tax reform proposal, which was released in September 2015, preserved the current charitable deduction. The current iteration of Trump’s plan would cap all itemized deductions—including the charitable deduction, mortgage interest deduction, and state and local taxes paid—to $100,000 for individuals and $200,000 for couples. This provision hits exactly those donors that account for the bulk of individual giving.
To see previous proposals to reform the charitable deduction, click here.