The North Texas Community Foundation invited local CPAs, attorneys and financial advisers to its bi-annual INSIGHTS for Professional Advisors event on May 15. This spring’s presenter was Ramsay H. Slugg, managing director and member of the National Wealth Planning Strategies group, U.S. Trust, Bank of America Private Wealth Management. Here is Slugg’s summary of the information he shared at this event.
The 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) was signed into law on Dec. 22, 2017, with the expectation that 90 to 95 percent of US taxpayers would fare better under the new law. Not everyone is so optimistic, and time will tell if that prediction comes true.
The expected reduced taxes for the masses would come from a combination of reduced income tax rates and expanded tax brackets. On the other side of the equation, the standard deduction was significantly increased, and many itemized deductions were reduced or limited in one form or fashion. A result is that many fewer individuals will itemize deductions going forward.
Conventional thoughts about the impact on charitable giving
While lower taxes and eased income tax administration would seem to be desirable ends, one area that has raised much concern is the effect of these changes on charitable giving and, in turn, upon services that charities would be able to provide to their constituents.
Changes affecting donors included:
1. Increasing the amount that may be deducted for donations to public charities from 50 to 60 percent of adjusted gross income, provided that all donations for that tax year are made in cash (check);
2. Elimination of the charitable deduction for 80 percent of the payment to college sports booster programs that allowed for preferential season ticket purchases; and
3. Elimination of the phase-out of itemized deductions, including charitable deductions, for higher-income taxpayers.
The changes with potentially more impact, though, came in other provisions such as:
1. A decrease in income tax rates, reducing the value of the federal income tax charitable deduction.
2. An increase in the standard deduction, meaning that fewer people will itemize deductions, meaning that they will receive no federal income tax benefit for their charitable contributions. Estimates of the number of taxpayers who will itemize deductions vary, but the Tax Policy Institute estimates that the percentage of returns with itemized deductions will drop from 21 percent of returns in 2017 to 9 percent of returns in 2018. This is particularly significant because 72 percent of all charitable giving comes from individuals, and 82 percent of that amount comes from taxpayers who itemize their deductions.
3. An increase in the estate tax exemption, reducing or eliminating the benefit of the federal estate tax charitable deduction.
All of those things happened in the new Tax Act. And based on that, the Congressional Budget Office and a number of charitable commentators believe that charitable giving will drop significantly, with estimates ranging from $4.9 billion to $24 billion!
If true, that is significant, compared with the $372 billion donated to charity in 2016, the last year for which reliable statistics are available.
Reason for hope about charitable giving levels
The good news is that, even though the above statements are true, there is a significant disconnect between tax law and actual behavior. In other words, although taxpayers do want tax efficiency, taxpayers are not primarily motivated to give to charity for tax or financial reasons.
And they shouldn’t be! Here’s how it works. Let’s say I have $100 of income, and I am in a 40 percent tax bracket. [That bracket doesn’t exist anymore, but the numbers work out the same no matter the bracket and no matter what type of asset is used or what charity is involved.]
If I don’t make a charitable gift and thus can’t take a deduction, I will owe $40 of tax, leaving me with $60. If I decide that I will make a charitable gift of $100 to avoid paying the tax, then I won’t owe any tax, but I won’t have my $60 either. The donation can reduce my tax bill by $40 if I itemize my deductions, but this is still less than the $60 I keep if I don’t make any donation. In other words, it is impossible to make money by giving it away.
Still, even though charitable giving never makes economic sense, according to Giving USA about two-thirds of Americans give money to charity every year. Not the same two-thirds each year, but two-thirds of the total population each year. Not that many people itemize deductions, before or after the 2017 Tax Act, and not nearly that many people even pay federal income taxes.
Moving into the higher-income population, according to the U.S. Trust Study of High Net Worth Philanthropy, almost all high-net-worth households give to charity every year. And combined, just the top 3 percent financially speaking make over 50 percent of all charitable gifts. Certainly, more of them itemize deductions and more of them pay taxes, but they actually do so at a lower marginal rate because a higher percentage of their income is from capital gains and dividends.
What about future giving? This same high-net-worth group has said that if the income tax charitable deduction were eliminated, 90 percent would donate the same or only a slightly lesser amount. And 95 percent report that their estate giving would actually stay the same or increase if the estate tax were eliminated.
So why do people give to charity? Simply, because they are charitable. People have been giving money to charity since before we had an income or estate tax. And studies show that the S&P 500 is a better predictor of changes in charitable giving than is tax policy.
How donors can make tax-efficient donations
For those who will be affected by the higher standard deduction, and who still want to make tax-efficient donations to their favorite charities, they should consider a tried and true technique of “bunching” deductions, for example, doing three years of charitable giving every third year, itemizing deductions in those years, and then using the standard deduction in the non-itemizing years. One could do this by giving directly or by using a donor-advised fund.
Another technique that will likely gain in popularity is the use of qualified charitable distributions (QCD), more commonly known as charitable IRA rollovers. People over 70 1/2 can direct that up to $100,000 a year be transferred directly from their IRA to one or more qualifying charities or to a designated fund (a QCD cannot be made to a donor-advised fund). A QCD does not result in a federal income tax charitable deduction, but the amount does not have to be reported as income in the same manner as a regular IRA distribution. It may also count against the required minimum distribution. In short, there will be no “penalty” for not itemizing deductions and still making charitable contributions.
Only time will tell if the 2017 Tax Act will lead to reduced charitable giving. I think not, at least not if the economy remains strong and the S&P 500 continues to increase. The past 63 years have seen only three declines in charitable giving, and all three of those years saw significant stock market decreases. Charitable giving rose in each of the other 60 years, despite repeated changes to tax law and tax policy.
Ramsay H. Slugg is managing director and member of National Wealth Planning Strategies group, U.S. Trust, Bank of America Private Wealth Management.
Cindy Hanes is director of philanthropic services,
North Texas Community Foundation. 817-877-0702 or email@example.com