For most individuals, the following highlights of the Act are the most important and seem to have experienced the most attention in the press:
- The Act nearly doubles the standard deduction (from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for married filing jointly), which will result in fewer tax filers itemizing their deductions;
- The Act maintains seven (7) federal income tax brackets for individuals; however, the marginal income tax rate is reduced at virtually every level;
- The child tax credit is doubled by the Act, the refundable portion of that credit is increased and the phase-out limitations for qualifying families are increased substantially (threshold is $400,000 under the Act for married taxpayers filing joint returns compared with $110,000 for 2017);
- The SALT deduction is limited to an aggregate of $10,000 for all itemizers other than married filing separately, who are then each limited to $5,000; however, individual tax filers and those filing as married filing jointly both are entitled to deduct up to $10,000 for state and local taxes; and
- The fact that fewer individuals will itemize their deductions has led to speculation that fewer individuals will make charitable donations as those who no longer itemize will no longer receive a direct tax benefit in the form of a deduction.
While it is true that fewer tax filers will itemize their deductions, this fact alone should not lead to fewer charitable deductions.
In fact, the income group that claims the majority of charitable contribution deductions, that range between $200,000 to $500,000, will nearly all continue to itemize their deductions, thus retaining their tax benefit associated with their charitable contributions.1 If past history is any indication, charitable organizations can expect charitable contributions to increase as Americans’ disposable incomes increase.
The limitation on the SALT deduction will impact very high income earners who live in states with high income taxes the most, as these individuals are more likely to have combined state and local income taxes that will significantly exceed the $10,000.00 threshold. While these taxpayers will not be able to deduct as much as before, their overall marginal rate of reduction should still provide them with a lower tax bill and more disposable income.
How will individual states respond? Different states have already responded to the limited SALT deduction by proposing that individuals in those states pay the taxes they would otherwise pay to the state government for state and local income and/or property taxes instead to designated funds that would be controlled by those same state or local governments.
The payments made by taxpayers to these funds would then qualify the taxpayer for credits against the state or local taxes they would otherwise owe. The goal of these legislative proposals in different states is to allow the taxpayer to effectively deduct 100% of all payments made to the “funds” for state and local taxes as a charitable contribution deduction.
The IRS, in Notice 2018-43, reminded taxpayers that “[d]espite these state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper characterization of payments for federal income tax purposes.” Substance over form will surely lead to the IRS treating any such deduction as a SALT deduction, subject to the $10,000 limitation, rather than as a charitable contribution deduction.