Planning for Life

Trump Tax Plan May Discourage Charitable Deductions

Posted by Anthony Bushu on February 8, 2017

By Harry S. Margolis

Several of President Donald Trump's tax plans have been described as threats to the ability of charities to raise money. While I oppose just about everything the new president stands for, there's one tax proposal I can get behind -- limiting total annual itemized deductions to $100,000 per taxpayer ($200,000 per couple).

Harvard Raises Over a Billion Dollars

This is in part because of where the charitable donations are going. Today's Boston Globe reports that Harvard University raised $1.2 billion in 2016 and that the top 20 schools raised 27% of all donations going colleges and universities last year. While Harvard is a terrific institution, it already started 2016 with more than $37 billion in its endowment. It's hard to see how the extra billion plus will change very many lives.

Trump Proposals That Could Discourage Charitable Giving

These are the tax proposals that Trump or his allies have floated that are seen as discouraging large contributions to charities:

  • Reducing the top tax rate to 33% and eliminating other taxes that can increase the top marginal rate. This will reduce the tax savings of charitable donations so higher-income donors will have less incentive to make gifts to charities.
  • Eliminating the federal estate tax. With no tax savings offered by bequests to charity, the rich may as well give all of their wealth to their children and grandchildren.
  • Limiting annual itemized deductions to $100,000 per taxpayer ($200,000 for a married couple filing jointly). Currently there's no limit on itemized deductions, but charitable deductions are limited to 50% of the taxpayer's adjusted gross income.

While the primary reason people give to charity is to support charitable causes, there's no doubt that reducing the tax incentive will affect charitable giving. Each of these changes have been predicted to reducing such donations by 4.5 to 12%, and cumulatively the effect could be greater.

Cap on Charitable Deductions

While I believe in higher tax rates for people with higher income and in the estate tax for a number of policy reasons, I also support a cap on charitable deductions (for estates as well as for personal income tax returns). While most charities do important work, so does government. And, through the ballot box, we have some control over how our tax dollars are spent. Charities are free to spend their funds as they like so long as they don't run afoul of the IRS rules on charities.

How We Pay for Deductions

But my biggest objection on unlimited charitable deductions for the rich is that the rest of us are paying for them. The deductions mean that less money comes in to the public coffers. As a result, either (1) everyone else pays higher taxes, (2) government incurs more debt which we end up paying for down the road, or (3) we receive a lower level of services. The reality is probably a combination of all three effects. The $1.2 billion going to Harvard means $500 million (more or less) less in federal income and estate tax revenue, and that's just from Harvard's share of the more than $40 billion that was donated to colleges and universities last year.

Read what my law school friend, Boston College Law Professor Ray D. Madoff has written on this topic in The New York Times.

Topics: income taxes, estate taxes, tax law

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