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Tax Cuts and Jobs Act: Protect & Expand Charitable Giving Incentives
The Tax Cuts and Jobs Act (“TCJA”), currently under debate in Congress contains a number of provisions that will impact charitable giving and the efficient operation of charitable organizations. As government funding for social service programs continues to decrease, we are concerned that any diminution in support of charitable contributions and changes in the ground rules for America’s charities will hamstring the operations of Jewish Federations and their affiliated agencies in their mission to help the most vulnerable among us. Indeed, the estimated $1.5 trillion increase in the deficit (the price tag attached to TCJA) will potentially trigger another round of cuts to a number of mandatory spending programs including an annual decrease of almost $25 billion a year to the Medicare program.
Our most important concerns regarding provisions in the TCJA include the following:
◦ Charitable Giving: Although the TCJA would preserve the existing charitable contribution deduction, retaining this vital giving incentive as one of the few remaining itemized deductions, we are deeply concerned that the interaction of several provisions in the legislation will result in a decrease in charitable giving. Doubling the standard deduction, combined with the elimination or limitation on a number of other “itemized deductions” will have the effect of greatly reducing the number of taxpayers who itemize their deductions, effectively removing the charitable contribution tax incentive for these taxpayers. (The number of taxpayers expected to itemize under the TCJA would drop from approximately 30 percent to 5 percent.) It is beyond dispute that a dramatic decrease in the number of taxpayers who claim the charitable contribution deduction, combined with a decrease in individual income tax rates will have a profoundly negative impact on dollars donated to charity. In fact, the Indiana University School of Philanthropy predicts a $13 billion decrease in annual giving, while The Tax Policy Center pegs the loss at $12 to 20 billion each year.
Our recommendation: The charitable sector is united in endorsing a proposal to expand charitable giving by providing a “universal charitable deduction” to taxpayers who claim the standard deduction and do not itemize. A universal charitable deduction would result in increased giving, both in terms of donors and dollars, assure fairness by incentivizing all taxpayer’s contributions, and provide additional tax relief to middle and lower-income taxpayers who may not itemize in the future. We urge the House and Senate to include a universal charitable deduction in the final version of the TCJA.
◦ Political Intervention: The House-passed version of the TCJA contains language that weakens the so-called Johnson Amendment, which prohibits public charities and religious organizations from endorsing or opposing candidates for public office. This provision currently shields charities and churches from the rancor of politics and enables individuals to come together to solve community problems free from partisan divisions. The House provision would permit charities to endorse or oppose candidates when communicating “in the ordinary course of the organization’s regular and customary activities,” and when spending “not more than de minimis incremental expenses,” both of which are ill or undefined terms. If enacted, the inevitable result would politicize charities, encourage creation of sham organizations, and divert charitable contributions to fund partisan organizations, undermining public trust and confidence in the America’s charitable community.
Our recommendation: We urge that the final version of the TCJA drop the House language and retain the current absolute prohibition on political campaign intervention by public charities and houses of worship.
◦ Private Activity Bonds: The repeal of private activity bond (“PAB”) financing would eliminate a cost-effective source of funds that charitable organizations utilize to underwrite the cost of facilities and infrastructure necessary to fulfill their mission. Qualified PABs are a proven mechanism with a decades-long record of successful capital financing of charitable facilities. Such bond financing is typically overseen by a unit of state or local government municipal bond authority. Federations and the affiliated agencies have utilized PABs to lower the cost raising necessary capital, so that other funds can more efficiently focus on their mission, helping the most vulnerable among us.
Our recommendation: Repeal of private activity bonds is only in the House version of the TCJA. We urge the House and Senate to drop the repeal of private activity bonds from the final version of the legislation.
◦ Medical Expense & State and Local Income Tax Deductions: Proposed changes to either eliminate or limit the current itemized deductions for medical expenses and state and local taxes will negatively impact segments of the population already at-risk, running counter to longstanding public policy. Elimination of the medical expense deduction will adversely affect those who have significantly high out-of-pocket medical expenses, such as nursing home costs, long-term care insurance premiums, as well as the cost for caregivers and other support needs for those who age-in-place. The medical expense deduction is of particular importance to those with disabilities, seniors, and others suffering from chronic illness. An unintended consequence of eliminating the deduction could force more individuals and families to rely on Medicaid, a program already under significant fiscal challenge. Similarly, repealing state and local tax deductions could result in a dramatic cut in critical state-funded community services such as Medicaid and other health-related services, transportation, and meals programs, among others. Such services are often the only programs touching the most vulnerable segments of our population, including seniors and the disabled.
Our recommendation: The repeal of the medical expense deduction is only in the House version of the TCJA. We urge that the medical expense deduction be retained in the final bill. Further, we recommend that the deduction for state and local taxes also be retained in the final version of the legislation.
◦ Endowment Excise Tax: The proposal to impose an excise tax on certain types of endowments contained in the TCJA is a misguided attack on an important component of the financial posture of charitable organizations. Endowed funds at public charities represent the organization’s promise to donors to use income and investment gains generated by their gifts to support an aspect of its mission in the future, often in perpetuity. In addition, charities maintain endowments or other reserves to enable them to respond to unforeseen economic conditions such as the downturn in the economy in 2007/2008 or unexpected events. Most recently America’s charities responded to the devastating catastrophes of Hurricanes Harvey, Irma, and Maria using dollars available from endowment funds. The proposed excise tax on “large endowments” is in an ill-advised attack on such vital charitable resources.
Our recommendation: We urge that the final version of the TCJA drop the excise tax on large endowment assets.
◦ Private School Education: Qualified tuition savings programs (so-called “529 plans”) allow earnings to grow tax-free and such funds are not subject to tax when withdrawn to pay for the cost of college. We support the provision in the House version of the TCJA that expands such plans to cover grade K-12 for tuition for public, private or religious elementary or secondary school. Jewish day school education plays a vital role in a fostering a vibrant Jewish community. Although local Jewish communities provide financial support to such schools, day school education is growing more and more costly, often making it unaffordable or a hardship, even for families with comparatively high incomes. A federal tax incentive such as the proposed expansion of 529 plans will help ameliorate this growing problem.
Our recommendation: The expansion of 529 plans is only in the House version the TCJA. We urge that the expansion of 529 plans to cover K-12 tuition costs be included in the final version of the legislation.
For further information, please contact Steven Woolf, Senior Tax Policy Counsel at (202) 736–5863 or steven.woolf@jewishfederations.org.