With the clock ticking down on the $1.5 trillion tax cut approved by Republicans in 2017, America’s wealthiest donors and their advisers are beginning to take stock of the sunsetting of provisions related to tax write-offs for charitable giving, according to local accounting experts.
Signed into law in 2017 and put into effect the following year, the tax cut legislation – informally referred to as the Tax Cuts and Jobs Act – allowed federal taxpayers to deduct up to 60% of their adjusted gross income on their annual tax returns for itemized cash donations to public charities. But if the tax cut provisions sunset as scheduled at the end of 2025, that limit will revert to 50% of adjusted gross income the following year. And this all comes after two years of tax returns during the COVID-19 pandemic when the Coronavirus, Aid, Relief and Economic Security Act allowed for charitable deductions up to 100% of the filer’s annual adjusted gross income as a way to incentivize philanthropists to give as much as possible at a time when in-person fundraising activities were hampered.
“The reversion from [60%] to 50% will affect that smaller group of high-wealth, high-number donors who are very philanthropic and wealthy,” said Carolyn Leslie, tax director for CBIZ Accounting, Tax & Advisory of New England LLC, which has offices in Providence and Boston. “Certainly, some of them might give slightly less.”
At the same time, the tax provistions meant that many more people have been claiming the standard deduction since the legislation increased the standard deduction from $6,500 to $12,000 for individual filers, and from $13,000 to $24,000 for joint returns, then adjusted each year for inflation. But, if the tax cut provisions sunset, the basic standard deduction would be roughly half of what it is now, meaning many more Americans filing itemized deductions and therefore creating more incentive to use charitable contributions as a write-off to avoid a higher tax bill, Leslie said.
“There are forces within these different levers being pulled by different tax moves, which will incentivize one group and disincentive another,” Leslie said. “It’s hard to know whether there will be more lower-level givers. … We don’t really know until the statistics come out if the move is successful.”
Earlier this year, a study released by researchers at Indiana University and the University of Notre Dame found that U.S. charitable giving fell year over year by about $20 billion in 2018, after the tax cut prompted about 23 million households to switch from itemizing their charitable deductions in 2017 to taking the standard deduction in 2018.
“I think we can say that [the tax cut] had a serious, negative impact on charitable giving,” said Joshua Siegel, director of Citrin Cooperman & Co. LLP’s tax practice, based out of its Providence office. “If the standard deduction were to sunset and the personal exemption return, it is anticipated that philanthropically inclined middle-income taxpayers will be more likely to make charitable contributions and take advantage of reducing their income tax burden.”
Siegel said the chances of a tax cut continuation would increase if former President Donald Trump were reelected, but whether he or Vice President Kamala Harris take office, the law’s provisions will likely be left to die by a Congress that is “paralyzed” by partisan divisions.
“There would have to be an overwhelming success of one party in both the House and the Senate to really push through any one party’s agenda,” said Siegel, a certified public accountant with more than 22 years in the business. “I think it’s more likely than not that the [tax cut] is going to expire.”
Siegel noted that the tax cut was passed through reconciliation, which means any tax cut must pay for itself with a corresponding spending cut, a major obstacle against the renewal of the measure. The Joint Committee on Taxation estimated that the tax cut would cost the federal government $1.46 trillion in potential tax revenue over 10 years, Siegel said, and he pointed to a projection from the Congressional Budget Office that renewing the tax cut would cost approximately $3.08 trillion.
“Which is not to say that there will not be a push to renew certain aspects of the [tax cut],” Siegel said. “It will depend on Congress.”
Siegel said the reintroduction of itemization through the restoration of the personal exemption could create a “renewed pipeline” for charitable donations from smaller donors, especially for those in states with high property taxes or real estate expenses.
For wealthier clients, Leslie advised planning larger charitable donations before the 2025 deadline to take maximum advantage of the 60% adjusted gross income cap.
Leslie said she encourages clients to consider alternative, tax-efficient giving mechanisms, such as appreciated stock donations and donor-advised funds, which allow contributions to be front-loaded and then distributed to charities over multiple years to come.
“It’s always a good time to be thinking about what those goals are and how you can maximize what you get into the charity’s hands,” Leslie said. “It’s really a nice part of our job working with our clients on their charitable goals to do the most good with what they have.”
Beyond the impact on individual donors and their accountants, charitable organizations are also closely monitoring Capitol Hill for any movement on the tax cut, as the sunsetting provisions will directly impact their ability to attract significant contributions from high-net-worth individuals and middle-income taxpayers alike. Whether the tax cut provisions sunset or are renewed in some capacity, the decision will undoubtedly shape charitable giving in the U.S. for years to come.
“It’s an uncertain time, but donors are always looking for ways to make a difference, whatever the tax code might hold,” Leslie said. n