As Americans, we inherently view philanthropy as part of our historic and ongoing commitment to bettering communities. As Tocqueville observed, “I have often seen Americans make large and genuine sacrifices to the public good, and I have noted on countless occasions that when necessary they almost never fail to lend one another a helping hand.” Charitable giving is part of the DNA of this nation and has been an American tradition since before the founding of our nation.
The current tax reform bills could have significant impact on how philanthropy is treated, encouraged, and fostered as part of the culture of supporting people and their communities through nonprofit organizations and institutions rather than relying on the government to provide all services.
Several of the current tax proposals in both the House and Senate versions would decrease taxes on for-profit corporations while allowing new ways to tax nonprofit organizations and either directly or indirectly increasing taxes on nonprofit employees.
The total sum of the changes, when put together, could have a staggering impact on the ability for nonprofit organizations to serve those in need and the safety net those organizations provide. Will government be ready to step in and serve those in need at a higher cost to all?
We present here an overview of the current House and Senate bills from this perspective.
Charitable Contributions: A Tax reform proposal provides for an increase in the adjusted gross income (AGI) limitations for cash contributions made by individuals. Generally, for certain types of organizations, the AGI limitation for cash contributions has been limited to 50 percent of AGI of the donor. The provision increases this limitation for cash contributions to these organizations from 50 percent to 60 percent of AGI. In addition, carryovers retain this 60 percent limitation treatment during the 5-year carryover period applicable to charitable contribution carryovers.
The proposal also makes nondeductible, in full, a deduction for college athletic event seating rights.
The statutory mileage rate for charitable contribution volunteer miles at 14 cents per mile has been removed and replaced with a rate that more clearly reflects the variable operating costs associated with a motor vehicle. The intent of the provision is to allow the IRS to determine, and make periodic adjustments to, the charitable standard mileage rate, taking into account the types of costs that are deductible under section 170 of the IRC when operating a vehicle in connection with providing volunteer services (i.e., generally, the out-of-pocket operating expenses, including gasoline and oil, directly related to the use of the automobile for such purposes).
State and Local Tax Deduction: The Senate bill eliminates the state and local tax deduction, while the House limits the deduction to $10,000 of property taxes.
- Impact: This tax increase for high-tax states, including New York and California, could substantially decrease discretionary spending to include gifts to charities.
Standard Deduction: The House and Senate bills both approximately double the standard deduction. (House and Senate Tax Plans: A Comparison)
- Impact: According to a study by the Indiana University Lilly Family School of Philanthropy, this change could result in a decrease in giving by $13.1 billion. Such a decrease would represent approximately a 3.4 percent decrease in giving going forward compared to 2016 total giving of $390 billion (Giving USA 2017). The decrease would be roughly half of the decline caused by the Great Recession of 2009, without a clear path for recovery. (Charitable Giving and the Great Recession)
Estate Tax: Both the House and Senate bills provide substantial changes in the estate tax. The House bill increases the exemption to $10 million from $5.49 million and eliminates the tax entirely after 6 years. The Senate moves the exemption to $11 million and leaves it in place.
- Impact: In 2010, when the estate tax was temporarily repealed, gross charitable bequests in IRS tax filings totaled $7.49 billion—a 37 percent drop from $11.9 billion the previous year. The tax returned in 2011, and charitable bequests soared to $14.36 billion. (Killing estate tax could kill charitable giving)
Endowments: Private educational institutions with at least 500 students and assets of $250,000 or more per student would be subject to a 1.4 percent excise tax on investment income. (Elite colleges with fat endowments are on the defensive) (Senate Bill Would Impose Endowment Tax but Keep Tuition Waivers Tax-Free)
- Impact: Institutions subject to this new excise tax would be forced to either reduce the amount of funds used to support the institutional needs, including student aid, or increase endowment payouts overall. (Endowments: The Specter of Taxation) (To Tax Or Not To Tax University Endowments)
Housing Allowances: Current IRS regulations allow most individuals who live in employer-provided housing as a requirement of their job to exclude from taxable income the rental value of the home. Under the new proposed tax plan, the maximum amount that may be excluded from income is limited to $50,000 ($25,000 for married filing separate returns) and to only one residence of the taxpayer at any given time. The amount of deduction is further decreased for highly compensated individuals. (Exempt organization-specific provisions in the House Bill H.R. 1)
- Impact: Individuals receiving employer-provided housing—especially university presidents, and independent schools heads (and faculty in some high-cost housing areas)—could be subject to this change and be required to include justification of house value as a part of total compensation.
Student Loan Debt: The House bill proposes to eliminate the current deduction that allows for up to $2,500 in student loan debt paid toward interest for individuals with AGI under $80,000. (Student Loan Interest Deduction) The current Senate version preserves the Student Loan Interest Deduction.
- Impact: The IRS reported that approximately 12 million people claimed this deduction in 2015. (Individual Income Tax Returns Line Item Estimates) Individuals with student loan debt, especially those who are younger and/or recent graduates who have income under $80,000 for a single filer or $160,000 for a couple, will no longer have this deduction available, essentially creating an increase in overall tax exposure.
Graduate Student Tuition Waivers: The House bill proposes to treat tuition waivers for college employees and graduate students as income, while the Senate version preserves the current waiver status. (Senate Tax Reform Bill Brief Summary)
- Impact: If the House proposal were to prevail, then graduate students across the country would see significant income tax increases on non-monetary benefits, creating a challenge from a financial standpoint. For institutions, especially private institutions, this would cause a dramatic shift in the ability to recruit students to these programs. (How the GOP Tax Plan Could Hurt Graduate Students—and American Research)
Unrelated Business Income Tax: Both the House and Senate bills have provisions to increase taxable income from unrelated business activities, including revenue generated from research that is not made “publically available,” royalties on logos, and the manner in which such income is accounted by the institution.
- Impact: This could result in significantly higher taxation on UBIT income, and therefore create greater tax liability for institutions and reduce funds available for institutional priorities, including operations, scholarships, and mission-related activities.
Excise Taxes on Tax-Exempt Organization Executive Compensation: Compensation paid by any tax-exempt organization exempt under section 501(a), including farmers’ cooperative organizations, certain governmental units, or political organizations, may be subject to a new excise tax if excessive in amount. The amount of excessive compensation is determined to be set at $1 million for an organization’s top five highest paid employees. In determining the amount of compensation subject to this provision, any set-aside to a Roth IRA account is not taken into account. The excise tax is assessed against the tax-exempt organization itself and equals 20 percent of the excess compensation paid over $1 million.
- Impact: The government will penalize organizations via a tax on the organization based on what the government thinks an organization should pay its leadership. This proposal could have a dramatic impact on the ability to recruit and retain leadership at the largest nonprofit organizations, including universities and institutions in high-cost urban areas.
Added on December 13, 2017
Tuition benefits: The tax reform under debate includes potential changes in the taxability of certain benefits including tuition remission. The House bill eliminates tax-free treatment of tuition remission and employer-provided educational assistance. In short, the value of those benefits are added back to the employee’s income and used to calculate a new tax bracket. Fortunately, the Senate bill retains the tuition remission benefit.
- Impact: The proposed tax legislation could have significant impact on independent school employees who otherwise could not afford to send their children to the same school at which they work. During this debate, it’s important to make it clear that tuition remission is a benefit that helps schools attract and retain quality talent – and the remission is not reserved for the highest paying positions. Tax reform shouldn’t undermine tuition benefits is an opinion piece that attempts to raise awareness of the ramifications of the House bill’s proposed changes. Other changes in the bill could affect deductions for teacher supplies, flexible benefits for childcare, taxation of unrelated business income including some uses of athletic facilities, employer provided housing and employees compensated $1,000,000 or more.
Some good news for independent schools: The proposed 1.4 percent tax on investments and endowments in both the Senate and House bills currently would apply only to private institutions of higher education.