The surprising result of the 2016 Presidential election means that the Republican Party will control the Executive and Legislative branches of government. As a result, we anticipate significant changes in tax law that could affect the tax benefits of charitable giving.
Trump’s tax proposal
President Trump’s proposal significantly curtails the benefits of itemizing deductions relative to current law because the plan would significantly increase the standard deduction for taxpayers who do not itemize. Although the proposal would preserve the deduction for charitable gifts (and mortgage interest), it would cap total itemized deductions, including charitable contributions, at $100,000 for single filers and $200,000 for married couples filing jointly. Such a cap would have little to no impact for donors who make modest annual charitable gifts. However, donors who wish to make large, transformational gifts could be limited in their ability to benefit from the income tax charitable deduction.
House’s tax proposal preserves charitable deduction
The tax proposal developed by House Republicans called A Better Way, led by Speaker Paul Ryan, shares many similarities with President Trump’s proposal. The House plan calls for a somewhat lower standard deduction than Trump’s proposal ($24,000 vs. Trump’s $30,000 for married couples filing jointly), in either case reducing the number of people who itemize under current law. Although, the House plan eliminates all itemized deductions except for the income tax charitable deduction and mortgage interest deduction, it would not place a cap on allowed deductions. The House proposal would therefore preserve the income tax charitable deduction in its current form, but reduce the number of taxpayers who could itemize charitable deductions.
What to make of it all?
The proponents of the Trump and House tax proposals need to hammer out their differences during legislative negotiations. But the many similarities between the two plans indicates that a final tax bill is likely to include these new provisions. Some of the tax law changes could reduce the tax benefits of making a charitable gift. Both plans also propose to lower the top income tax rate, a change which would effectively reduce the value of the income tax charitable deduction. Nonetheless, the mortgage interest and charitable deductions are likely to be preserved, but could be subject to dollar caps.
The House plan suggests that the best way to promote charitable giving is to improve the overall health of the American economy. Indeed, in theory a more robust economy could spur more charitable giving despite reduced tax incentives for charitable giving. Needless to say, it will be interesting to see how the process of reconciling these competing proposals plays out.