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 a donor, here is a guide to the changes that may be most important for you to understand.
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For individuals and families that continue to itemize their deductions, the Pease Limitation is repealed under the new law.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.
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.
What It Means For You
The new tax law is an opportunity for you, as a donor, to meet with your advisors and assess the potential impact the Tax Cuts and Jobs Act may have on your individual tax situation. The majority of the donors we work with at The Chicago Community Trust make charitable gifts—including to new and existing donor advised funds—out of a desire to create positive change in their communities. The new tax law does not change that driving motivation.
Yet there are significant and important tax benefits to making charitable gifts—during life, and at death. For example, for donors who prefer to make gifts of cash, the higher AGI limits may be an incentive to make additional gifts to their donor advised funds.
The new tax law’s lower individual rates, and the significant changes to the standard deduction and itemized deductions, means that donors should take the time to understand what impact, if any, the Tax Cuts and Jobs Act may have on the tax implications of their charitable gifts.
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 our donors and their professional advisors 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 firstname.lastname@example.org or (312)565-2832.