Summary and Analysis of The Final Tax Reform Legislation
See the Council's statement on the passage of the final tax reform bill - December 20, 2017.
Having passed different versions of tax reform in the House (H.R.1) and Senate (S.1), a conference committee was established to negotiate a single version of the bill. This committee issued conference report on Friday, Dec. 15, which provided a final version of the tax reform bill.
After making a handful of last-minute technical changes, the Senate voted 51-48 in the very early hours of the morning on Dec. 20 to pass tax reform. The same afternoon, the House voted 224-201 to pass the final version with the Senate's updates. President Trump signed the bill into law on Dec. 22.
Congress will undertake efforts to pass an additional bill to correct technical errors in the tax reform legislation when it reconvenes in January, but this is not expected to significantly change the substance of the tax overhaul.
For additional information, please visit our Tax Reform webpage.
See how the issues relevant to philanthropy are addressed in the final version of the tax reform legislation:
Individual Giving Incentives
- Individual Income Tax Rates
- Standard Deduction
- Charitable Contributions
- Itemized Deductions & Pease Limitation
- Estate Tax
All Foundations
Community Foundations
Private Foundations
- Private Foundation Excise Tax
- Art Museums Classified as Private Operating Foundations
- Private Foundation Excess Business Holdings
Other Provisions Affecting Tax-Exempt Organizations
Individual Giving Incentives
Individual Income Tax Rates
Current Law: There are seven tax brackets at rates of: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates are effective for taxable years beginning after December 31, 2017, and expires for taxable years after December 31, 2025.
Previous Law: The rate structure included seven tax brackets at rates of: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
Implications for Philanthropy:
Changing the individual income tax brackets changes how much people owe in taxes—regardless of whether that ends up being more or less than what they previously owed. This could impact taxpayer behavior in a myriad of ways—from someone owing more in taxes and therefore having less discretionary income, to someone owing less in taxes but also having less of an incentive to make charitable contributions due to a lower rate.
Standard Deduction
Current Law: Compared to previous law, the standard deduction nearly-doubled to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples. This increase is effective for taxable years beginning after December 31, 2017, and expires for taxable years after December 31, 2025.
Previous Law: The standard deduction for 2017 was $6,350 for individuals, $9,350 for heads of household, and $12,700 for married couples.
Implications for Philanthropy:
Increasing the standard deduction will cause anywhere from 91% to 95% of taxpayers to take the standard deduction instead of itemizing deductions on their taxes. Since the charitable deduction is only available to benefit a taxpayer as an itemized deduction, anyone who chooses to take the standard deduction will not have access to the benefit of the charitable deduction—which has a clear impact on charitable giving behavior.
Charitable Contributions
Current Law: This legislation:
- Maintains the charitable deduction in its current form with no enactment of a universal charitable deduction;
- Increases the AGI limitation for charitable cash contributions from 50% to 60% with no changes proposed for non-cash gifts (effective for taxableyears beginning after December 31, 2017, and would expire for taxable years after December 31, 2025);
- Eliminates the alternative gift substantiation, which—in certain cases allows—the receiving organization to file a separate document with its annual IRS return rather than provide a contemporaneous gift receipt to donors for contributions exceeding $250 (effective for taxable years beginning after December 31, 2016).
Previous Law: The charitable deduction is a provision which allows individuals to reduce their taxable income by the amount of the charitable contributions they make (with some limitations) if they itemize their deductions. As a result, taxpayers generally are not subject to federal income taxes on money they give away to charities. Some limits apply depending on the type of gift (cash, stocks, and real property, for example) and the type of organization receiving the gift.
A charitable contribution deduction is limited to a certain percentage of the individual’s adjusted gross income (AGI). The AGI limitation varies depending on the type of property contributed and the type of exempt organization receiving the property. In general, cash contributed to public charities, private operating foundations, and certain non-operating private foundations may be deducted up to 50% of the donor’s AGI. Contributions that do not qualify for the 50% limitation (e.g., contributions to private foundations) may be deducted up to the lesser of (1) 30% of AGI, or (2) the excess of the 50% -of-AGI limitation for the tax year over the amount of charitable contributions subject to the 30% limitation.
Capital gain (i.e., appreciated) property contributed to public charities, private operating foundations, and certain non-operating private foundations may be deducted up to 30% of AGI. Capital gain property contributed to non-operating private foundations may be deducted up to the lesser of (1) 20% of AGI, or (2) the excess of the 30% -of-AGI limitation over the amount of property subject to the 30% limitation for contributions of capital gain property.
Additionally, a donor/taxpayer must obtain a contemporaneous written acknowledgement (or a gift receipt) from the charity to which he/she donated $250 (or more) in order to substantiate that contribution for claiming the charitable deduction. As an alternative, the Code provides an option for the charity to file a document with the IRS containing detailed information about the gift and the donor in lieu of providing a gift receipt.
Implications for Philanthropy:
Leaving the structure of the charitable deduction unchanged fails to account for changes made elsewhere in the tax code that would have indirect, negative consequences on charitable giving (i.e. nearly-doubling the standard deduction, decreasing the top marginal income tax rates, and doubling the threshold for the estate tax). A number of studies report consistent estimates that enacting such changes to the tax could would decrease charitable giving by anywhere from $13.1 billion to $16 - $24 billion. The congressional Joint Committee on Taxation (JCT) also estimates that number of taxpayers and amount they claim in charitable deductions will decrease by approximately 40% (or, $95 billion) under the House bill.
The increase to the percent limitations on AGI is positive, as it allows donors to claim a larger charitable deduction proportional to their income from current law—but there is no evidence to support the idea that this change will mitigate the large-scale decrease in giving in a significant way.
The idea behind eliminating the gift substantiation alternative was initiated under a proposed rulemaking from the IRS in 2015. The Council submitted formal comments to oppose the implementation of the rule, stating our concerns with:
- The administrative burden this process would place on charitable organizations to collect this information from donors;
- The privacy of donors' sensitive information;
- The deterrent effect this could have on charities' relationships with their donors; and
- The "slippery slope" it poses to evolve from an optional method to a mandatory requirement.
In response to the many concerns articulated in the comments received on this matter, the IRS withdrew the proposed rule in January 2016.
For additional information, see our Charitable Deduction webpage.
Itemized Deductions & Pease Limitation
Current Law: The following itemized deductions are preserved from previous law:
- Mortgage interest (on mortgages up to $750,000);
- Charitable contribution;
- State and local taxes (with a cap of $10,000 for the aggregate of state/local property taxes and, either, state/local income or sales taxes);
- Limited instances of the personal casualty and theft losses; and
- Limited amount of medical expenses.
The Pease Limitation on itemized deductions is repealed—which removes the cap to the total amount of itemized deductions that upper income taxpayers are allowed to claim.
All of these changes are effective for taxable years beginning after December 31, 2017, and expire for taxable years after December 31, 2025.
Previous Law: A taxpayer who is eligible to take itemized deductions totaling an amount greater than the standard deduction will generally do so by filing Schedule A of the Form 1040. Current itemized deductions include medical and dental expenses, taxes paid at the state and local level, mortgage and some investment interest, charitable contributions, casualty and theft losses, job expenses and certain miscellaneous deductions, and other miscellaneous deductions.
The total amount of itemized deductions (other than medical expenses, investment interest, and casualty, theft, or wagering losses) is limited for certain upper-income taxpayers (sometimes referred to as the “Pease limitation”). This limitation applies on top of any other limitations applicable to such deductions. Under the Pease limitation, the otherwise allowable total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds a threshold amount. For 2017, the threshold amount is (1) $261,500 for single individuals, (2) $313,800 for married couples filing joint returns and surviving spouses, (3) $287,650 for heads of households, and (4) $156,900 for married individuals filing a separate return. The Pease limitation does not reduce itemized deductions by more than 80%.
Implications for Philanthropy:
The number of, and which, itemized deductions that are preserved from previous law has an impact on the number of taxpayers for whom it makes more sense to itemize rather than taking the standard deduction. Since the charitable deduction is only available to benefit a taxpayer as an itemized deduction, anyone who chooses to take the standard deduction will not have access to the benefit of the charitable deduction—which has a clear impact on charitable giving behavior.
Estate Tax
Current Law: The threshold for estates subject to the estate tax is doubled from previous law (from $5 million to $10 million). This is effective for estates of decedents dying after December 31, 2017, and expires for taxable years after December 31, 2025.
Previous Law: Any estate that was transferred from a decedent to another individual and has a taxable value that exceeded $5 million was subject to a tax. The taxable value of a decedent’s estate was calculated by taking the gross value of an estate and subtracting applicable deductions (including the charitable deduction).
Implications for Philanthropy:
According to Giving USA 2017, approximately 8% (or $30.36 billion) of all charitable giving comes from giving by bequest. Often times, bequests are planned under consideration of how that charitable contribution will factor in with application of the estate tax. Changes to the estate tax (expanding the threshold or repealing it) wiIl decrease a taxpayer's incentive to make charitable bequests as a means of lessening the overall impact of the estate tax.
In 2010, a year in which the estate tax was temporarily repealed, we saw a 37% decrease in charitable giving by bequest.
All Foundations
Johnson Amendment
Current Law: There were no changes to political intervention by 501(c)(3) charitable organizations in the 2017 tax code overhaul.
Previous Law: 501(c)(3) charitable organizations are prohibited from participating in, or intervening in (including the publishing and distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office. This prohibition is often referred to as the “Johnson Amendment”—named after then-Senator Lyndon B. Johnson, who introduced it in 1954.
Implications for Philanthropy:
The House bill included a provision that would have permitted all 501(c)(3) charitable organizations to engage in political interventions occurring in the “ordinary course of the organization’s regular and customary activities” and incurring “not more than a de minimus incremental” cost. Though the provision was intended for the benefit of churches, its detrimental effects would have been felt across the charitable sector.
Charities are granted tax-exempt status because the primary reason for their existence is to further a specific charitable purpose. Campaigns and political organizations are designated under a different part of the tax code and are subject to different rules (and less generous tax treatment) given that the nature of their work and purpose is different. Opening the door to allow for political activity by charities (a classification which includes churches) creates an atmosphere that compromises the integrity of charitable work in a way that could be catastrophic for the sector. A number of considerations that would factor into this include:
- Even if only a small handful of groups accept contributions they receive for their missions and redirect those funds to be used for a politically-motivated purpose (i.e. financial or messaging support for a political campaign), other donors to that group will be reluctant to give for fear that their donations will likewise be misused.
- The decision in the Citizens United v. Federal Election Commission case (often referred to as Citizens United) deemed political spending as a form of protected speech under the First Amendment. Weakening the Johnson Amendment could pave the way for additional money to flow from charitable organizations into electoral activity.
There was a concerted effort to incorporate the provision from the House bill into the Senate bill. Ultimately, the Senate Parliamentarian ruled that the provisions did not meet the Byrd Rule requirements under the rules of reconciliation—and therefore, it was excluded from the final bill.
For additional information, see our Nonprofit Political Activity webpage.
Unrelated Business Income Tax (UBIT)
Current Law: Tax-exempt organizations (EOs) are required to treat each trade or business activity separately for UBIT purposes. Whereas under previous law, separate trade and business activities could be used to offset UBIT liability (by offsetting losses with income), under current law, there are fewer opportunities to do so—with the only offsets allowed being between different tax years for the same trade or business activity.
*Additionally, certain fringe benefits to employees such as transportation and on-premises gyms and athletic facilities are now characterized as unrelated business taxable income and tax-exempt entities are required to pay the tax on the value of those benefits equal to the corporate tax rate.
Previous Law: Income derived from a trade or business regularly carried on by an organization exempt from tax under Code section 501(a) (including pension plans) that is not substantially related to the performance of the organization’s tax-exempt functions is subject to the unrelated business income tax (UBIT). The highest corporate rate is applied to unrelated business income.
Income subject to UBIT is based on the gross income of any unrelated trade or business less the deductions directly connected with carrying on such activity. In cases where a tax-exempt organization conducts two or more unrelated trades or businesses, the unrelated business taxable income is the aggregate gross income of all the unrelated trades or businesses less the aggregate deductions allowed with respect to all such unrelated trades or businesses. As a result, losses generated by one unrelated trade or business may be used to offset income derived from another unrelated trade or business.
*Additionally, tax-exempt entities are situated similarly to taxable entities with regard to providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, as such benefits pass from the employer to the employee free of tax at both levels. Employers subject to Federal income tax may deduct the costs of such benefits, with tax-exempt entities not needing to deduct the costs of such benefits, and their employees may exclude the values of such benefits from their taxable incomes.
Implications for Philanthropy:
The requirement to treat each unrelated business activity separately for the purposes of calculating UBIT was intended largely as a ‘revenue raiser’ (of roughly $3.5 billion over 10 years) to pay for other changes in the tax code overhaul, and immensely complicates the administration of legitimate unrelated business activities.
*Further legal research is pending on the issue of subjecting the value of fringe benefits as UBIT. We will provide an updated analysis as new information is available.
For additional information, see our Unrelated Business Income Tax webpage.
Charity-Executive Compensation
Current Law: Tax-exempt organizations are subject to a 21% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. Compensation includes cash and the cash value of benefits other than payments of a tax-qualified retirement plan and amounts that are excludable from the executive’s gross income.
Once an employee is determined to be one of the five highest compensated employees, the organization is responsible for paying the 21% excise tax (equivalent to the corporate tax rate under this bill) on any compensation over $1 million. The excise tax also applies to “excess parachute payments”—a payment contingent on the employee’s separation from the organization that equals or exceeds three-times the amount of that employee’s base compensation.
Previous Law: Under previous law, the business deduction allowed to publicly traded C corporations for compensation paid with respect to chief executive officers and certain highly paid officers is limited to no more than $1 million per year. Similarly, previous law limited the deductibility of certain severance-pay arrangements (“parachute payments”). No parallel limitation applied to tax-exempt organizations with respect to executive compensation and severance payments.
Implications for Philanthropy:
This provision primarily impacts the largest charities—such as hospitals and universities. It was intended as a ‘revenue raiser’ (of $1.8 billion over 10 years) to pay for other changes in the tax code overhaul, but could have implications for how executives and the tax-exempt organizations they work for report compensation and benefits.
Community Foundations
Donor Advised Funds (DAFs)
Current Law: There were no changes to the administration of DAFs in the 2017 tax code overhaul.
Previous Law: 501(c)(3) public charities are permitted to administer donor advised funds (DAFs)—to which donors may give charitable contributions and thereafter provide nonbinding advice or recommendations with regard to distributions from the fund and/or the investment of assets in the fund.
Implications for Philanthropy:
The House bill included a provision which would have required DAF sponsoring organizations to disclose information about the funds they manage. The idea for that provision had its roots in negotiations from the summer of 2015 to piece together what became known as the CHARITY Act. The reporting requirements were accepted by the charitable sector in exchange for an expansion of the IRA charitable rollover to allow for distributions to DAFs.
Ultimately, the provision was removed during the conference committee negotiations.
For additional information, see our Donor Advised Funds webpage.
Private Foundations
Private Foundation Excise Tax
Current Law: There were no changes to the rate structure of the private foundation excise tax in the 2017 tax code overhaul.
Previous Law: Private foundations are subject to a 2% excise tax on their net investment incomes. However, they may reduce this excise tax rate to 1% by making distributions equal to the averages of their distributions from the previous five years plus 1%.
Implications for Philanthropy:
The House bill included a provision that would have consolidated the private foundation (PF) excise tax to a single rate of 1.4%. The Council has long advocated for a simplification of the PF excise tax to a flat rate of 1%, and the House has voted to do the same on two occasions (under the America Gives More Act of 2014 and 2015). The increased rate of 1.4% was intended as a ‘revenue raiser’ (of $500 million over 10 years) to pay for other proposed changes in this bill.
Ultimately, the provision was removed during the conference committee negotiations.
For additional information, see our Private Foundation Excise Tax webpage.
Art Museums Classified as Private Operating Foundations
Current Law: There were no changes to the operating requirements, with respect to a minimum number of hours open to the public, in the 2017 tax code overhaul.
Previous Law: Private operating foundations are a form of private foundation that primarily fund their own programs and activities as opposed to making grants to other organizations. Private operating foundations are not subject to the same 5% payout rate as private non-operating foundations. Some art museums are classified as private operating foundations under the Internal Revenue Code.
Implications for Philanthropy:
The House bill included a provision that would have required art museums that are currently classified as private operating foundations to be open for admission to the public at least 1,000 hours per year in order to maintain that private operating foundation classification (and as such, be exempt from the 5% payout rate that private non-operating foundations are subject to).
Ultimately, the provision was removed during the conference committee negotiations.
Private Foundation Excess Business Holdings
Current Law: There were no changes to the rules pertaining to excess business holdings taxes for philanthropic enterprises with a private foundation in the 2017 tax code overhaul.
Previous Law: Under current law, a private foundation may not own more than a 20-percent interest in a for-profit business, and any private foundation that does hold an interest in excess of 20% is subject to a 10-percent excise tax based on the value of that excess holding unless the private foundation divests itself of the excess holdings within 5 years of the date of receipt. Any private foundation that does not divest itself of such excess holding in a timely manner may be subject to an additional 200-percent excise tax based on the value of that excess holding. The excess business holding rule also applies to donor advised funds held by public charities.
Implications for Philanthropy:
A provision to make an exception for excess business holding tax rules for philanthropic business holdings (where a foundation 1. holds the interests of the business enterprise at all times during the tax year; 2. acquired ownership interests under the terms of a will or trust; 3. directs all profits toward a charitable purpose; and 4. operates independently from the business enterprise) was included in the House bill, as well as the original version of the Senate bill. However, the provision was struck from the Senate bill by the Senate Parliamentarian for not meeting the Byrd Rule requirements under the rules of reconciliation.
On its own, this provision has experienced support in both the House and Senate (as it has been included in the CHARITY Act as well as stand-alone bills). This provision—championed by the Newman’s Own Foundation, due to the way it is structured and integrated with its corporate counterpart—would have saved the foundation from the effects of a 200% tax, for which it has until November 2018 to secure an exemption from Congress.
Ultimately, the provision was excluded from the final 2017 tax code overhaul due to the issues with meeting the rules of the reconciliation process.
Other Provisions Affecting Tax-Exempt Organizations
Private College and University Endowments
Current Law: Private colleges and universities with at least 500 students (of which, at least 50% must be located in the United States) and total assets of at least $250,000,000 ($500,000 per a minimum of 500 students; excluding those assets which are used directly for carrying out the institution’s educational purpose) are subject to a 1.4% excise tax on net investment income. The net investment income upon which the excise tax is assessed is calculated as the total net investment income of the educational institution and its “related organizations”—defined as an organization that:
- Controls, or is controlled by, the institution;
- Is controlled by one or more persons that control the institution; or
- Is a supported or a supporting organization during the taxable year with respect to the institution.
The calculation of total assets and net investment income requires the inclusion of only the income generated by related organizations (such as university foundations) intended for the use or benefit of the related educational institution. Further, the amount of income by a related organization may only be taken into account for the calculation of total assets and net investment income for a single educational institution.
Previous Law: Private foundations are subject to an excise tax on their net investment income (see “Simplification of Private Foundation Excise Tax”). This excise tax does not apply to the investment income of public charities. As with public charities, colleges and universities were exempt from this excise tax.
Implications for Philanthropy:
This provision does not directly impact charitable grantmaking foundations, but it does reflect a sense of skepticism among lawmakers for endowed funds and the policies and practices for how those funds are distributed.
