Advisor's Quarterly Update

You are here

Tax Law and the Future of Planned Giving

The surprising result of the 2016 Presidential election means that the Republican Party will control the Executive and Legislative branches of government at the inauguration of Donald Trump. As a result, we can expect some significant changes in tax law next year. We can make a pretty educated guess at what the changes will look like and how your clients may be impacted. 

President-Elect Trump’s tax proposal

Trump’s plan is to reduce the current seven income tax brackets to three.  The highest rate would be 33%, down from the current top rate of 39.6%.  His proposal is to more than double the standard deduction to $15,000 for single filers and $30,000 for married couples filing jointly.  In return for the increase in the standard deduction, only itemized deductions for mortgage interest and charitable giving would be preserved.

While preserving the deduction for charitable gifts and mortgage interest, the proposal would cap total itemized deductions, including charitable contributions, at $100,000 for single filers and $200,000 for married couples filing jointly.

The more generous standard deduction could affect the way Americans think about housing and charitable giving.  Assume a married couple in the 33% bracket that pays $17,000 a year in mortgage interest.  Under current law, this couple would save more in taxes by itemizing than if they used the standard deduction of $12,600 in 2016.  Since they are already itemizing, every dollar of charitable contributions will save them 33 cents in taxes. If the standard deduction increases to $30,000, this couple could save more in taxes by taking the standard deduction. Gifts to charity would not save them anything on their taxes since they no longer itemize.

The President-Elect’s plan would eliminate the estate tax reducing the incentive for high net worth clients to make charitable gifts from their estates.  However, his plan would also eliminate the step-up in basis on assets inherited from estates in excess of $10 million. It is unclear what would happen to the gift tax.

House’s tax proposal similar to President-Elect Trump

The tax proposal developed by House Republicans, led by Speaker Paul Ryan, shares many similarities with the Trump proposal.  The House plan recommends the same three income tax brackets and eliminating the 3.8% Medicare surtax. Unlike Trump’s plan, the House plan proposes lowering capital gains tax rates to half the proposed income tax rates: 6%, 12.5%, and 16.5%. It also calls for a somewhat lower standard deduction: $24,000 vs. Trump’s $30,000 for married couples filing jointly. The House plan would eliminate all itemized deductions except for charitable deductions and mortgage interest, which is similar to Trump’s, but the House plan would not place a limit on allowed deductions. Like Trump’s plan, the House plan would eliminate the estate tax and the alternative minimum tax.

What to make of it all?

The many similarities between the two plans suggest what will become part of a final tax bill. It appears likely that there will be no 3.8% Medicare surtax, federal income taxes will be substantially reduced, and many itemized deductions other than deductions for charitable contributions and mortgage interest will be disallowed. The standard deduction will likely be greatly increased and the alternative minimum tax eliminated. It is unclear if there will be a reduction in capital gains tax rates, but the estate tax likely will be gone.

What should advisors be telling clients? In general, the tax benefits of making a charitable gift will be reduced and in some cases eliminated. Many clients who have previously itemized deductions will take the standard deduction giving them no tax savings for charitable gifts. Those who still itemize will save less from deductions because their tax rate will be lower.

Final Takeaway

As with any changes in tax laws, new opportunities and strategies will emerge to provide incentives for clients to follow through with their philanthropic plans, although possibly with limited, if any, government tax incentives.

Do not assume your client will reduce or stop charitable giving if there is a reduction in tax incentives. While tax incentives may influence the amount and timing of a gift, study after study shows that the commitment to the charity’s mission is what motivates your client to give.  Look to help your client achieve their philanthropic goals.