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Potential tax reform on the horizon: Considerations for your 2016 charitable giving

An increased possibility of tax reform means donors may want to take a second look at their 2016 giving plans.

Tax reform has been highlighted as a key priority for President-elect Donald Trump and Republicans in Congress. Itemized deductions, including the charitable contribution deduction, are likely to be among the items up for discussion as income tax reform proposals take shape. Most proposals under consideration, including President-elect Trump's, would reduce what some donors can deduct to offset their taxable income.

With the December 31 deadline to make a 2016 tax-deductible charitable contribution rapidly approaching, donors need to quickly decide whether to make any shifts in their giving plans with tax reform discussions on the horizon. This brief guide can help donors make informed decisions about this year’s charitable giving while considering possible changes in the tax laws in future years.

1040 tax-form and calculator

How might tax reform impact the income tax charitable deduction?

Most of the tax reform unveiled by Republicans could impact the incentive for charitable giving by reducing marginal income tax rates, changing the value of itemized deductions or otherwise modifying the ability to claim a deduction for charitable giving.

President-elect Trump's most recent tax reform plan proposes to:

  • Lower tax rates on individual, business and investment income.

  • For individual income, the plan would consolidate the existing seven tax brackets into three. The top tax bracket would drop from 39.6% today to 33%, meaning the tax benefit of making a charitable deduction would be reduced.

  • Cap all itemized deductions—including mortgage interest, medical expenses, charitable contributions and others—at $200,000 total for joint filers and $100,000 for single filers.

This compares to current limits of up to 50% of adjusted gross income (AGI) for donating cash to a public charity and up to 30% AGI for donating securities and other assets to a public charity.

Seven charitable tax deduction questions answered

How might tax reform impact capital gains tax savings for charitable contributions of long-term capital gains property?

Under current law, donors who donate long-term appreciated securities, real estate or other long-term property may save as much as 23.8% (including 20% capital gains and a 3.8% Medicare surtax) on such donations compared to donating the after-tax sales proceeds. Under President-elect Trump’s proposal and other proposals under consideration, the Medicare surtax could be eliminated, meaning donors would incur smaller tax savings for property donations. Other proposals call for a reduction in capital gains tax rates, which would have a similar impact, and it is also possible that current tax treatment of donations of property could change if comprehensive tax reform is enacted.

Learn about the benefits of donating long-term appreciated securities to charity

With tax changes that may affect the charitable deduction under discussion, what should I consider before December 31?

You should consider proposed changes in conjunction with your charitable giving plans, especially if you typically itemize your deductions. You should consult with your tax advisor to determine whether increasing your charitable giving this year, when the income tax regime is known and certain, makes sense for you. By giving more in 2016, your contributions would be subject to current deductibility limits—up to 50% AGI for cash and 30% for long-term appreciated securities for contributions made to public charities. At current marginal rates, a charitable donation made this year may possibly offer greater tax savings than a charitable donation made in the future.

Another important consideration to discuss with your tax advisor would be the availability of carry-forwards that might enable you to take excess charitable contribution deductions in future years.

Read more about tax strategies for charitable giving

If I am considering front-loading, how can a donor-advised fund help?

A donor-advised fund could be a good solution for those seeking to "pre-fund" their charitable giving and support the charities they care about most. Donor-advised fund programs, which are sponsored by public charities, such as Fidelity Charitable, allow donors to make a charitable contribution in the current tax year and then recommend grants to the charities of their choice on their own timetables—immediately or over time. Note that if comprehensive tax reform is enacted, new requirements related to donor-advised funds may be on the table as they have been included in some past proposals. Donors may contribute to their existing donor-advised funds or can easily establish a donor-advised fund with the donation of a variety of assets. At Fidelity Charitable, these assets include stocks, bonds, mutual funds, real estate, private business interests and many others.

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