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Tax Reform Bill Would Reduce Giving, Repeal Johnson Amendment

After months of speculation and consideration, The House of Representatives has introduced a tax reform bill, H.R. 1, the Tax Cuts and Jobs Act, that would lead to a significant drop in charitable giving and allow churches, but not all nonprofits, to engage in partisan politics.

The bill, a sweeping overhaul of the tax code, doubles the standard deduction—to $24,400 for couples and $12,200 for individuals—which shifts millions of taxpayers from itemizing their taxes to taking the standard deduction. Consequently, as many 30 million taxpayers who itemized in 2016 will no longer have the charitable giving incentive available to them, and will be taxed on their gifts.

Based on research from Independent Sector and the Lilly Family School of Philanthropy, that shift would result in a staggering loss of up to $13.1 billion in contributions annually. The charitable deduction would be available to only 5% of all taxpayers, causing this significant drop in contributions. Up to 95% of taxpayers would be taxed on their gifts to charity.

“The doubling of the standard deduction has the unintended but very severe consequence of reducing individual giving by almost 6 percent every year,” said Mike Geiger, president and CEO of AFP. “That’s why AFP has been working hard to educate Congress about the need for a universal charitable deduction. It is a necessary addition to the tax bill if we want to keep philanthropy strong in the U.S. and not put even more pressure on charitable fundraisers.”

The universal charitable deduction would be available to all taxpayers. It would offset the losses anticipated under the current plan and potentially increase giving by $7 billion annually to America’s charitable organizations. Furthermore, because the deduction will be available to all taxpayers, it could foster a culture of giving much earlier, providing an incentive to young taxpayers who are beginning to make their charitable investments in the communities and causes they care about. 

With the House expected to begin mark-up and formal debate of the bill very soon, AFP is working, along with its partners in the Charitable Giving Coalition, to get the universal charitable deduction inserted into the tax bill.

Johnson Amendment

The tax reform bill contains a provision that would partially repeal the Johnson Amendment, which prohibits charities from directly or indirectly attempting to influence an election or defeat of any candidate for public office.

The provision would only provide an exemption for churches and related auxiliaries, which has already caused some controversy, with Congressional staff maintaining the final bill will include an exception for all houses of worship. In addition, some groups are concerned that the provision creates a loophole, allowing for the creation of fake congregations that would use their status to funnel more money into electioneering.

AFP announced its position on the Johnson Amendment earlier this year.

Other Provisions

The tax bill would also affect fundraising, philanthropy and the nonprofit sector in the following ways:

  • Doubling the estate tax exemption, from $5.49 million per individual to $11 million, and then eliminating the estate tax after six years.
  • Increasing the current adjusted gross income (AGI) limitation for cash gifts from 50% to 60%.
  • Creating a 1.4 percent income on private university endowments, applicable to institutions with assets of more than $100,000 per student.
  • Replacing the current two-tiered tax on foundation’s net investment income with a single 1.4 percent excise tax.
  • Implementing a 20 percent tax on compensation of more than $1 million paid to a nonprofit’s five highest paid employees.

The Senate Finance Committee is expected to roll out its version of a proposed tax code overhaul on Thursday, according to the chair of the committee, Sen. Orrin Hatch, and other Republican leaders. The Senate is hoping to pass the bill quickly to get a finalized tax bill to President Donald Trump's desk by Christmas.

However, there could be substantial differences between the House and Senate version of the tax bill., giving the sector an opportunity to ensure the universal charitable deduction is included in the final version.

AFP will update members on the status of tax reform and will send out legislative alerts when action is needed. 

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