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Policy Brief: Proposed Tax Plan by the White House

Publication date: 
Friday, May 12, 2017

The White House has proposed an outline for tax policy changes. The one page document provided by the Administration outlines tax policy changes that have the potential to affect philanthropy. The most relevant tax proposals that would affect philanthropy as a sector includes:

  • Doubling the standard deduction
  • Repeal of the Estate Tax
  • End itemized deductions (except mortgage interest and charitable contributions)

This outline sets forth the White House’s position on tax cuts and endeavors to begin tax policy changes with Congressional leaders. This policy brief summarizes the items that have the most effect on philanthropy. Specifically, the above tax policy changes would decrease charitable giving to nonprofits (resulting in a higher demand for support from philanthropic organizations), affect contributions to community and operating foundations, and potentially hinder the creation of new philanthropic institutions.

 

PROPOSALS AFFECTING PHILANTHROPY

Standard Deduction

The White House proposes to double the standard deduction. This is similar to Speaker Ryan’s “Better Way” plan announced last year. The chart below demonstrates the new deductions under the proposed plan.

Filing Status

Existing Deduction

Proposed Deduction

Single or Married filing separately

$6,300

$12,600

Married filing jointly or qualifying widow(er) with dependent child

$12,600

$25,200

Head of Household

$9,300

$18,600

 

Note: This chart does not apply for people born before January 2, 1952 or a person with visual impairments.

The standard deduction establishes a base amount of income that is not subject to tax, and reduces a taxpayers adjusted gross income (AGI) that is used to determine the income subject to tax. Doubling the standard deduction means doubling the base amount of income that is exempt from federal income tax. Most taxpayers choose the standard deduction because it is larger than the deductions they can itemize. Others choose that option because it is easier than identifying and totaling the expenses they could itemize or because they do not realize that itemizing would reduce their tax liability.

Effect on Charitable Giving: Doubling the standard deduction affects the tax incentive for making charitable gifts for 95 percent of taxpayers. With a higher deduction, it is likely that people would claim the higher standard deduction rather than separately itemizing things like mortgage interest payments and charitable gifts. Currently, charitable contribution and miscellaneous deductions averaged about $4,800 each, or about 17 percent of total itemized deductions.

According to a 2013 study by the Johnson Center for Philanthropy at Grand Valley State University, Michigan residents gave less following a repeal of a state tax credit for donations to community foundations. Giving of $400 or under to community foundations decreased by an average of 27.2 percent. However, the report made clear that the decrease in giving, while strongly correlated with the elimination of the tax credit elimination, did not specify a causal link.

Estate Tax

The estate tax is a tax on cash, real estate, stock, or other assets transferred from a deceased person to their heirs. The federal estate tax is due only to the portion that exceeds approximately $5.5 million per person ($11 million per couple). The average tax rate paid by those affected by the estate tax is approximately 17 percent. However, as with income tax, these marginal rates differ depending on the amount in excess of $5.5 million. The estate tax affects approximately 0.2 percent of taxpayers. 

Effect on Charitable Giving: The Congressional Budget Office studied the effects on charitable giving in a 2004 study when Congress contemplated a repeal of the estate tax. Because repealing the estate tax reduces the incentive to contribute for all decedents who would have faced it, a repeal of the estate tax would have induced a decrease in charitable bequests of 16 percent to 28 percent.

Charitable Contributions Preserved

The White House preserves the deductions for charitable contributions. However, the two aforementioned proposals would affect the tax incentive for the charitable contribution. In other words, while the charitable contributions deduction is preserved, it is likely that the majority of taxpayers will opt for the larger standard deduction.

Consequently, charitable infrastructure organizations are calling for “an above-the-line” deduction. An above-the-line deduction is a direct adjustment to a person’s AGI. The “line” refers to AGI, and if a deduction is “above-the-line” it has a direct offset to the income reported. All taxpayers can claim “above-the-line” deductions regardless if of whether a person takes standardized or itemized deductions.

In contrast, “below-the-line” deductions occur after the AGI calculation occurs. Below-the-line deductions are itemized deductions. Currently, charitable contributions are “below-the-line” deductions in addition to home mortgage interest, state and local taxes, and medical expenses exceeding 10 percent of AGI (among several others).

Effect on Charitable Giving: Because above-the-line deductions affect all taxpayers, a policy that changes charitable deductions from below-the-line to above-the-line would allow all taxpayers to take the deduction of the contribution, serving as a tax incentive to make charitable contribution. Consequently, the tax code would provide an incentive for those taking a standard deduction to make charitable contributions so that those charitable contributions could be deducted.

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Special Initiatives