Bench & Bar

JAN 2018

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11 BENCH & BAR | 31, 2023. 13 e Senate, however, chose only to double the exemp - tion amounts rather than fully repeal the estate tax. is brewing conflict between the Senate and House versions was addressed in conference with the Senate's proposal prevailing. 14 Charitable organizations benefit, at least in part, from the estate tax's existence. Bequests made to charitable organizations are excluded from an individual's estate. In theory, a wealthy individ- ual would much prefer to see his or her wealth passed to a favorite charity than to the federal government. People make charitable bequests for many reasons, and avoiding tax is only one motiva- tion-but it is a strong motivation. Would donors be as generous in their estate planning without the estate tax? Supporters of repeal suggest that by doubling the estate tax's exemptions, wealthy indi- viduals, who would also be benefiting from other tax cuts, will have more income—a wealth effect—allowing them to contribute more to their favorite charities. Dr. Patrick Rooney's research suggests that wealthy people might not be as generous without the estate tax. 15 By lowering the tax rate, Congress is effectively raising "the price of donating an estate gift"—a price effect. 16 Economic principles would suggest that when prices go up, people consume less. Here, Dr. Rooney argues that raising the price of a charitable contribution would reduce charitable bequest giving. As more people are exempted from the estate tax, fewer people will leave charitable gifts at all, or they will leave smaller gifts. Other research suggests that the estate tax encourages donors to give more during life and at death. 17 By elim- inating the estate tax's application, Congress is impacting charitable gifts made both during life and at death. Dr. Rooney is not alone. Aaron Dorfman, President and CEO of the National Committee for Responsive Philanthropy, also believes that an estate tax repeal would harm philanthropy. 18 Mr. Dorfman notes that taxpayers subject to the estate tax "are responsible for a significant percentage of total charitable giving." Anecdotally, he cites a drop in charitable bequests made in 2010, when the estate tax was temporarily repealed. Bequests dropped by 37 percent from 2009 to 2010, and then rose by 92 percent from 2010 to 2011, when the estate tax was restored. 19 Will we see a similar jump in 2026 when the Tax Cuts and Jobs Act's expanded exemption sunsets? For a rough estimate of how much this proposal might impact bequests, in 2004, the Congressional Budget Office, which produces nonpartisan, independent analyses of budgetary and economic issues for Congress, estimated that repealing the estate tax would cause charitable bequests to decline by 22 percent. 20 Based on reports from Giving USA, estimated 2016 bequests totaled around $30 billion. 21 If bequests were to decline by 22 percent today, the charitable sector could experience a reduction in end-of-life giving of about $6.7 billion, not to mention gifts lost or reduced during a donor's lifetime. DOUBLING THE STANDARD DEDUCTION Senate Majority Leader Mitch McConnell (R-KY.) and Treasury Secretary Steven Mnuchin visited Louisville on the day of "e Great American Eclipse" (Monday, August 21, 2017) for a Cham- ber of Commerce luncheon on tax reform. While not quite as awe-inspiring as experiencing "totality" or monitoring Mrs. Louise Linton's Instagram account that day, 22 I attended the discussion and appreciated comments from two of the "Big Six" indicating that the charitable deduction would not be impacted by tax reform. However, the two glossed over how raising the standard deduc- tion might impact the charitable deduction's usefulness. By nearly doubling the standard deduction, 23 reform efforts would make irrelevant for many households any itemized deduction categories spared, including the charitable giving deduction. According to Vikki Spruill, President and CEO of the Council on Foundations, doubling the standard deduction will reduce by "approximately 25 million the number of Americans who will itemize on their taxes." 24 Ms. Spruill's estimate may be low. According to an Urban-Brook- ings Tax Policy Center (the "Tax Policy Center") analysis of the House's 2016 tax reform plan, which included similar elements, 38 million (or 84 percent) of the 45 million itemizers would opt for the standard deduction. 25 It is clear that the number of taxpayers itemizing will shrink. In turn, this suggests that gifts to charities will shrink. Also, many taxpayers will pay lower marginal tax rates, further reducing the "value" of a charitable giving deduction. As tax rates decrease, the after-tax cost of charitable giving increases. ere are advantages to the changes. Doubling the standard deduc- tion will simplify both the Internal Revenue Code and the Internal Revenue Service's administration of it. (But for those who believe this reform effort was driven by simplification, think again.) 26 And some non-itemizers will continue to give to charities regardless of tax write-offs. But the roughly two-thirds of taxpayers who do not itemize account for only about 18 percent of charitable giving, according to the Tax Policy Center. 27 Given rumors of these standard deduction changes, many leaders in the nonprofit sector had been trumpeting a charitable deduction for all taxpayers, not just taxpayers who itemize. A non-itemizer deduction could increase charitable giving without costing the United States Treasury revenue or adding to the IRS's adminis- trative burden. 28 In fact, Representative Mark Walker (R-NC), chair of the conservative Republican Study Committee, introduced the "Universal Charitable Giving Act" in October 2017 with an eye toward including it in tax reform. 29 Charity advocacy groups view the universal deduction as a way to maintain a tax incentive for charitable giving even if the standard deduction is raised. In sup- port of this dialogue, the Independent Sector launched an awareness campaign—called "Giving100"—to expand those eligible to deduct charitable contributions. 30 While, the Universal Charitable Giving Act's provisions were not included in the Tax Cuts and Jobs Act, perhaps it can be negotiated into what will likely be the "Technical and Miscellaneous Revenue Act of 2018" to fix already apparent drafting errors. RAISING REVENUE Congress needed to find ways to pay for some of the individual

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