On November 2, Speaker of the House Paul Ryan (R-WI) and House Ways and Means Committee Chairman Kevin Brady (R-TX) published the Tax Cuts and Jobs Act (TCJA). The long-awaited bill proposes major reforms for individual and corporate taxes.
Chairman Brady supported the bill and stated, "Today marks the beginning of the end of our nation's broken tax code. The Tax Cuts and Jobs Act will deliver real tax relief to Americans across the country - especially low and middle-income Americans who have been struggling for far too long to earn a raise and get ahead."
Senate Majority Leader Mitch McConnell (R-KY) echoed the favorable comments of Brady. He noted, "Today, the House of Representatives put a big step forward in our effort to help provide the American people with a robust economy that reaches for its full potential: that puts more money in middle-class pockets, that produces better jobs for workers, that secures more opportunity for our children."
House Ways and Means Ranking Member Richard Neal (D-MA) opposes the tax reform act. He stated, "A rushed, partisan and secret process yielded over 400 pages of broken promises to middle-class families. This bill falls short of reform, falls short of middle-class tax relief and falls short of the fiscal principles to which Republicans have long held themselves."
The individual provisions are designed to simplify taxes. With the standard deduction doubled to $24,000 for married couples and $12,000 for single persons, over 90% of Americans will be able to use a "postcard" tax return, which would include the taxpayer's income, retirement plan deductions, standard deduction and tax payment.
The other individual provisions are designed to simplify the tax process.
- Tax Rates - The new rates would be 12%, 25%, 35% and 39.6%.
- Retirement Plans - Retirement plan contributions would continue to be deductible as in prior years.
- Home Mortgage Deductions - Interest on loans for a primary residence would be deductible for mortgage amounts up to $500,000.
- Property Taxes - Property taxes would be deductible up to a limit of $10,000 a year.
- Charitable Gifts - Taxpayers would be able to continue to deduct cash gifts with a higher potential limit. The limit is increased from the current 50% to a higher amount of 60% of adjusted gross income.
- Other Deductions - Most other itemized deductions would be repealed.
- Alternative Minimum Tax (AMT) - The AMT would be repealed.
- Estate Tax - There would be an increased basic exclusion amount of $10 million. The estate tax would be repealed in 2023.
This overview of the 429 page proposed tax reform act is offered as an educational service for our readers. If major tax reform passes, it will impact all Americans. The Senate is expected to publish its tax reform bill within two weeks. The House hopes to vote on TCJA by Thanksgiving. After both the House and Senate pass tax reform acts, there will be a conference to draft the final bill. While House and Senate leaders are optimistic, it will be difficult for Congress to pass a comprehensive tax bill prior to the end of this year.
TCJA and Charitable Giving
The Tax Cuts and Jobs Act (TCJA) includes four provisions affecting charitable gifts by individuals.
The current 50% of adjusted gross income limit for cash gifts to public charities would increase to 60%. This may increase giving by generous donors.
The existing 80% deduction for gifts to obtain college athletic events seating would be repealed. Payments to a college for preferred seating on the football game 50-yard line would no longer be deductible.
For many years, the charitable mileage rate has been 14 cents per mile. Under the TCJA, the IRS would be able to adjust this to a higher number each year to reflect increased transportation costs.
Finally, it is predicted that doubling the standard deduction would reduce the number of itemizers from about 30% to less than 10%. This may reduce charitable giving for taxpayers who take the larger standard deduction.
Independent Sector President Daniel Cardinali expressed concern over this change and noted, "In fact, by raising the standard deduction and not adding the universal deduction, this bill effectively cuts out 95% of Americans from access to the only incentive that is altruistic. This is not in the spirit of what we advocated for with the universal deduction, which would have expanded the incentive to 100% of all taxpayers."
Delayed Estate Tax Repeal
Previously, Speaker Ryan and Chairman Brady had stated they would repeal the estate tax. The Tax Cuts and Job Act would increase the basic exclusion amount to $10 million and delay estate tax repeal until 2023.
The gift tax would be retained with a 35% rate and the annual exclusion of $15,000 (2018 indexed amount) would also be retained.
With the proposed repeal of estate and generation skipping transfer taxes in 2023, it is necessary to retain the gift tax. Otherwise, individuals with appreciated property may give assets to family members to reduce capital gains tax upon sale.
There may be a political reason for the delayed repeal of the estate tax. Sen. Susan Collins (R-ME) and other senators have expressed concern about the full repeal of the estate tax. Delaying the repeal may make the tax reform act acceptable to one or more key senators.
TCJA Changes for Exempt Organizations
There are several provisions in the Tax Cuts and Jobs Act (TCJA) that will impact nonprofits.
Private foundations currently pay a 2% or 1% excise tax on investment income. The existence of the double rate structure has created complexity for private foundations. TCJA creates a single rate of 1.4% for this excise tax.
Some private foundations operate art museums and use charitable gifts for their own operations rather than making grants to other nonprofits. Under TCJA, a private foundation operating an art museum must open it to the public for at least 1,000 hours per year.
Many large universities have substantial endowments. TCJA requires private colleges and universities with 500 or more students and over $100,000 of endowment per full-time student to pay an excise tax on income in the amount of 1.4%.
Private foundations are limited by the Sec. 4943 excess business holdings rules to owning a 20% interest in a business. TCJA permits a private foundation to own 100% of a business received by gift or bequest if all annual net profits are given to charity. There also must be separate board members for both the private foundation and the business.
Donor advised funds will have new disclosure rules. The DAF policies and average grants will be reported annually to the IRS.
Finally, there is a new 20% excise tax on salaries of nonprofit employees who are paid over $1 million per year. The $1 million limit will include salary and benefits with the exception of contributions to qualified retirement plans.
Applicable Federal Rate of 2.4% for November -- Rev. Rul. 2017-21; 2017-46 IRB 1 (17 Oct 2017)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2017. The AFR under Section 7520 for the month of November will be 2.4%. The rates for October of 2.2% or September of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here