Highlights of H.R. 1, the Tax Cuts and Jobs Act

Late on Friday, the joint House and Senate Conference Committee agreement on H.R. 1, the Tax Cuts and Jobs Act, was released. The agreement now goes back to both the House and Senate where final passage is expected to take place by tomorrow or Wednesday.  It is important to note that virtually every provision in the conference agreement would be effective starting in 2018. (Note further that most of the “tax reduction” provisions expire at the end of 2025.) As such, there is still time for donors to take advantage of last-minute tax planning for certain items, including accelerating charitable contribution deductions.

The agreement includes some major changes to individual tax rules that will reduce the number of taxpayers who will itemize their deductions, including the charitable contribution deduction.  Next year JFNA will continue to advocate for a universal or “above-the-line” charitable deduction so that all incentive for giving will be available for all. We will continue to oppose any weakening of the prohibition against political campaign intervention as well as push for expanded incentives for donor-advised funds.

Below find a summary of the major provisions in the conference agreement that would affect donors and charitable organizations.

 

Donor Impact Provisions

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Charitable Contribution Deduction:  The itemized deduction for charitable contributions remains in place and there is an increase in the individual “adjusted gross income” (AGI) limitation for cash gifts from 5% to 60%. The increase in the AGI limitation is effective for tax years beginning in 2018.

Observation: Because of the interaction of a number of provisions in H.R. 1, charitable giving is expected to decline in the future. These provisions include the doubling of the standard deduction and the repeal or limits on a number of other itemized deductions (such as those for state and local taxes), a reduction in the marginal tax rates for individuals, corporations, and pass-through businesses, and the doubling of the credit against the estate and gift taxes.  These provisions will greatly decrease the number of taxpayers that itemize (and thus benefit from a tax deduction for charitable giving) as well as “increase the cost of giving” for those who continue to itemize. Donors who see that their marginal tax rate will decline in 2018 may want to consider accelerating deductible contributions, including pre-paying pledges before the end of December.

Observation: Despite our lobbying, there is no “universal” or “above-the-line” deduction in H.R.1. An above-the-line deduction would have ameliorated the impact of many of the provisions described above.

 

Other Charitable Deduction Provisions: The current deduction for a portion of a charitable contribution for the right to purchase tickets to college athletic events is repealed. The provision is effective for tax years beginning in 2018.

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Identification of Securities: The conference agreement does not include the rule that would have required investors who sell or gift securities to use the “first in, first out” (FIFO) method. The FIFO rule would have required investors who purchased shares of corporate stock at different times to sell or gift their oldest shares first.

Observation:  Adoption of a FIFO requirement would have restricted donor flexibility in gifting those stocks with the greatest amount of untaxed appreciation when considering making such gifts to charitable organizations such as federations or Jewish foundations.

 

Related Donor Provisions

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Standard Deduction:  The conference agreement increases the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. The provision is effective for tax years beginning in 2018 and would apply until the end of 2025

Observation: As noted above, this large increase in the standard deduction, coupled with the limitation or elimination of a number of itemized deductions will shrink the number of taxpayers currently itemizing (approximately 30 percent) to less than 10 percent. Some estimates show that number to be as low as 5 percent. Only those who itemize will benefit from the charitable contribution deduction.

 

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Medical Expenses: The conference agreement retains the itemized deduction for medical expenses for two years, 2018 and 2019, and reduces the AGI threshold to 7.5 percent for the current tax year as well as 2018 and 2019.

Observation: This change will make it easier for some to claim the benefit from the medical expense deduction, including those with significant one-time medical costs or those with chronic medical expenditures, on this year’s tax return and for the succeeding two years.

 

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State and Local Taxes: The state and local tax deduction would be limited to $10,000 per year for a combination of local property and income taxes, beginning in 2018. The conference agreement also provides that individuals may not claim an itemized deduction in 2018 on a pre-payment of income tax for future tax years in order to avoid the $10,000 dollar limitation.

Observation: The explicit reference to pre-payment of future state and local income taxes is an important provision that could impact planning strategies that some taxpayers had contemplated.

 

Home Mortgage Interest: The conference agreement provides that acquisition debt of no more than $750,000 would be deductible beginning in 2018. Further, there would be no deduction for home equity debt.

 

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Estate and Gift Taxes: The conference agreement doubles the estate and gift tax exemption beginning in 2018. This is accomplished by increasing the basic exclusion amount ($5.6 million per spouse to $11.2 million or $22.4 million for a married couple).

Observation: There is no change in the so-called “stepped-up” basis rule at death which allows property to pass to heir at fair market value at death.

 

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Section 529 Plans: The conference agreement allows Section 529 plans to be used for up to $10,000 of tuition and certain home school expenses for private elementary and secondary school. The provision would be effective for distributions made beginning in 2018.

Observation: This provision will enable families to save in non-deductible tax-free accounts for the cost of day school and other private education.

 

ABLE Accounts:  The conference agreement allows rollovers from Section 529 accounts to qualified ABLE accounts and increases the annual contribution limitation for ABLE accounts. The provision would be effective until the end of 2025.

 

Disaster Relief: The conference agreement provides that for personal casualty losses that arose on or after January 1, 2016, in a presidentially-declared disaster area, such losses are deductible without regard to the 10 percent AGI floor if the loss exceeds $500 per casualty.

 

Organization Provisions

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Political Activities: The conference agreement drops the House-passed provision that would have permitted houses of worship and other public charities from endorsing or opposing candidates for public office in the ordinary course of business and if only de minimis expenses were incurred.

Observation: The protection of the so-called “Johnson amendment” was a key priority for JFNA and other Jewish organizations and we will continue to fight to ensure that this protection from partisan political activity is retained in the tax code.

 

Donor-Advised Fund Reporting: There are no additional reporting requirements imposed on donor-advised funds in the conference agreement.

Observation: Additional reporting requirements contained in the House-passed bill could be added in the future. Such reporting requirements are part of proposed “CHARITY Act” legislation that would extend IRA charitable contributions to donor-advised funds. It is hoped that Congress may pass this legislation next year to extend the rollover to DAFs.

 

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Private Activity Bonds: The conference agreement retains the current favorable tax treatment for private activity bonds (PABs), which are an important source of financing infrastructure projects such as new buildings and other facilities for federations and related agencies. The agreement does, however repeal  the current income tax exclusion for interest on advance refunding bonds (tax-exempt bonds that allow an issuer to obtain the benefit of lower interest rates), effective for bonds issued after 2017.

Observation: In addition to protecting PABs, the conference agreement also keeps the New Market Tax Credit which also provides funding for community economic development through credit allocations via public charities.

 

 Unrelated Business Income Taxes: The only major change to unrelated business income taxes in the conference agreement would require the UBTI be computed separately with respect to each separate business operation so that deductions from one generally cannot offset income from another. The provision is effective for tax years beginning in 2018.

Observation: The conference agreement also expands UBIT to tax certain fringe benefits such as qualified transportation and parking provided to employees.

 

Excise Tax on Certain College Endowments: The conference agreement imposes a 1.4 percent excise tax on the net investment income of private colleges and universities with over 500 students (where more than half of the students are located in the U.S.) and aggregate endowment assets in excess of $500,000 per student. The provision would be effective for tax years beginning in 2018.

Observation: JFNA opposed this tax which is the first “excise tax” on the endowment assets of a public charity and will continue to speak out against any provisions that would inhibit endowed or planned giving vehicles.

 

Excise Tax on Excessive Compensation: The conference agreement imposes a 21 percent excise tax on compensation over $1 million paid to certain employees of tax-exempt employers and imposes a similar excise tax on “parachute payments” to executives contingent on retirement.

 

Other Education Provisions: The exclusion of qualified tuition reduction programs for employees of colleges, universities, and private schools (including day schools) is retained in the conference agreement. This provision enables day schools to offer reduced or free tuition to children of faculty and staff with no adverse tax consequences.