On December 22, 2017, President Donald Trump signed the Tax Cuts and Jobs Act into law. The legislation makes significant changes to corporate and personal tax laws, including changes in rates, deductions and credits available to individuals and business entities.
As you and your clients determine the impact of the changes on your clients’ financial and estate plans, now is a great time to revisit or begin conversations about philanthropy and legacy.
Changes in Tax Rates
The central piece of the legislation is a reduction in income tax rates for individuals and corporations. Tax rates for individuals lowered across the board starting January 1, 2018, with rates ranging from 10% to 37%. The new individual rates under the Tax Cuts and Jobs Act are scheduled to expire on December 31, 2025.
For individuals that own pass-through businesses—including partnerships, S-corporations and some limited liability companies—a new 20% deduction on pass-through business income tax may be available, depending on the taxpayer’s ability to claim the deduction.
Standard and Itemized Deductions
One of the most significant changes in the new tax legislation is the increase of the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers ﬁling jointly.
Individuals and families may continue to choose to itemize deductions; however, some deductions are reduced and/or capped under the Tax Cuts and Jobs Act. For example, under the new law, if a taxpayer pays state and local taxes and itemizes deductions on their federal tax return, the itemized deduction for state and local taxes is limited to $10,000.
For individuals and families that continue to itemize their deductions, the Pease Limitation is repealed under the new law.
Charitable Deduction and AGI Limitations
A donor’s ability to claim a charitable deduction is limited to that donor’s adjusted gross income, or AGI. The limitation depends on a variety of factors, including the type of asset being contributed and the organization receiving the contribution. Additionally, a taxpayer must itemize deductions on her federal tax return in order to deduct charitable gifts.
For some of your clients who are already charitable, the idea of bundling several years’ worth of donations into a donor advised fund at the Trust may be a great way to offset the tax liability in a high-income year. This may be especially true for donors who tend to give from income, as opposed to assets.
Previously, an individual who contributed cash to public charities, such as The Chicago Community Trust, could deduct up to 50% of her AGI from her federal taxes. An individual who contributed publicly traded securities to a public charity could deduct up to 30% of her AGI from her federal income taxes.
Under the new Tax Cuts and Jobs Act, the AGI limitation for cash contributions to public charities is increased from 50% to 60%. The new legislation does not make any changes to the rules impacting non-cash gifts, such as gifts of publicly traded stock, mutual funds and exchange traded funds.
Gift and Estate Taxes
The Tax Cuts and Jobs Act left in place the top rates for estate and gift taxes, but doubled the basic exclusion amount to $10 million per individual, adjusted for inflation. This means that an individual who dies in 2018 may be able to bequest up to $11.2 million to family and friends free from estate tax. The change is effective as of January 1, 2018 and is set to expire on December 31, 2025.
While the new law likely impacts each of your clients differently, one constant is that philanthropy can and should be a part of the conversation about the changes. As a resource for you and your clients, we are happy to assist in those conversations.
For example, the doubling of the gift and estate tax base exclusion amount may suggest that charitable bequests and planned gifts are primed to decrease. Yet any professional advisor who works with affluent individuals has probably heard from at least one client, “My kids have too much already. I don’t want to leave them anything more!”
Such exclamations prove there are many reasons—aside from tax implications—that an individual would include an organization like the Trust in their estate plan. For your clients who feel like they and their families have sufficient wealth, now may be a great time to talk about charitable planning.
For your clients who are already charitable, the higher AGI limits for cash gifts may be an incentive to make additional cash gifts to charity in the coming years. For some clients, the idea of bundling several years’ worth of donations into a donor advised fund at the Trust may be a great way to offset the tax liability in a high-income year. This may be especially true for donors who tend to give from income, as opposed to assets.
Our team at The Chicago Community Trust is always happy to help you think through ways to engage with your clients around the topic of philanthropy. With the new tax law—and the many yet-to-be-answered questions it raises—now is a great time to start those conversations.
The Chicago Community Trust is monitoring forthcoming IRS and U.S. Treasury Department Regulations that apply to donor advised funds. The new regulations are likely to provide clarity on issues pertaining to fulfilling personal pledges with grants from donor advised funds, and other issues pertaining to donor advised funds that community foundations have long sought from the IRS and Treasury.
And as always, the Trust looks forward to working with you and your clients in 2018 and beyond. For more than 100 years, we have been a trusted partner to philanthropists across the city, region and country, and we look forward to continuing to support our donors in this new tax law environment.
Be sure to connect with the Trust on LinkedIn for the latest insights into philanthropy. And if you have questions about how these tax law changes may impact your charitable giving, please contact Tim Bresnahan, senior director of gift planning, at email@example.com or (312)565-2832.