Will Tax Reform Help or Hurt Charitable Donations and Religious Donations?

Investing

Published: September 27, 2017 3:17 pm

Last Updated: January 12, 2020 7:44 am

Without surprise, both sides of the aisle have issued their own heated opinions about the new Republican tax proposal with President Trump. There are some obvious issues in the current tax code which would get simplified under the new tax plan. Then on the other side of the coin, there are some tax implications for the years ahead which may not fully be known until we actually see how taxpayers really behave if the new code were to be implemented.

One key area that always comes up for debate under future taxes is how charitable deductions should be treated. Many of the itemized deductions may be cut in the current tax reform plan, with an expanded amount of the standard deductions. But the new plan says that it “retains tax incentives for home mortgage interest and charitable contributions.”

There is a problem solely looking at the term “retains tax incentives.” Should this be taken at face value, as in status quo? Or should it be considered a bargaining chip where “incentives” might not be the same as they are today? Looking between the lines it sees that “retaining incentives” could be up for interpretation.

One key issue to consider is that most charitable donations fall under the standard deductions as it has stood for years under the current tax code. Whether they would be increased or decreased ahead remains to be seen. There are differing opinions about whether charitable organizations would do better or worse under any current or other proposed changes that have been made in the past.

24/7 Wall St. has gathered several views on what exactly might happen to charitable giving if taxes change or if they do not change along with how they are treated today. First and foremost, a lot if this will depend on the actual tax brackets that would be passed and what the standard or amended deductions might change to.

The stated goal under the new tax plan of reducing the number of tax brackets down to three tax brackets may in reality come down to four tax brackets. The Republican plan shows the three primary brackets to go down to 12%, 25%, and 35%, but that fourth bracket comes into play with this statement:

An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.

The IRS code currently includes “a church, synagogue, or other religious organization” as one of the 8 qualified organizations that qualify as a deduction under charitable contributions. The current tax code states:

You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases.

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And here are some of the current recent opinions and interpretations about what charitable organizations (including religious entities) might expect.

According to a prior Fox Business report:

Moving charitable donations out of the itemized category or as policy writers call it, “above the line,” would allow people who take the standard deduction to also deduct their charitable donations from their taxable income.

According to the CNBC interpretation:

Doubling the standard deduction would reduce the use of tax breaks for homeownership and donating to charities… Just 20 percent of tax returns currently claim those deductions… Nonprofits and homebuilders worry that having no tax incentive would negatively impact real estate and charitable giving.

Most other publications, including liberal and conservative sites checked, simply refer to the charitable deductions as being retained but without any projections or guidelines on how those charitable donations might be impacted in the years ahead.

It seems hard to imagine that the tax code would change in such a way that charitable organizations (again, including religious organizations) would be penalized. That being said, there have almost certainly been millions of off-camera private debates among friends and family members about whether charitable and religious deductions should skew towards being exempt from taxes entirely to not being tax exempt at all — and at many points in between.

Stay tuned. This tax debate looks far from over.