Charitable donations and gifts to donor advised funds rose substantially in 2016, due in part to anticipated tax changes this year. And while the failure of Republicans to come together on a health care plan has raised questions about the future of tax reform, it’s still likely some legislation will pass this year, in part because Republicans have a vested interest in achieving legislative victories before the 2018 midterm elections.
Though the precise components are unclear, proposals are likely to call for a blend of corporate and individual income tax cuts. The Trump administration has proposed a reduction in the top marginal tax rate to 33% from today’s 39.6%. The lower the marginal tax rate, the lower the tax deduction in dollar terms for charitable contributions. Furthermore, conservatives in Congress may insist that the tax cuts be “revenue neutral” in order to prevent increasing budget deficits. The offset could be a cap or elimination of itemized deductions, including the charitable deduction.
Sometimes new tax legislation is made retroactive to January 1, but other times it only goes back to mid-year. In 2003, for example, when the capital gains tax rate was reduced to 15%, it only applied to trades made after May 6 (the date the legislation was passed). So, charitable donations made in early 2017 might benefit from both a higher marginal tax rate and an exemption from any newly imposed limits.