Tax Cuts and Jobs Act: The Good, the Bad and the Ugly

Heard at the Water Cooler Charitable giving is higher when economy is doing better? Most donors do not give solely because of tax benefits? Donors who are motivated by tax benefits may be inclined to reduce their charitable giving? The Bottom Line ------------------------------------------------------------------ Most donors are waiting on more information

Corporate Tax Rates The bill lowers the corporate tax rate to a flat 21% on all profit. This is not only a massive tax cut but is also a major simplification compared with the 2017 corporate tax structure. Taxable Income Range Marginal Corporate Tax Rate (2017) $0-$50,000 15% $50,000-$75,000 25% $75,000-$100,000 34% $100,000-$335,000 39% $335,000-$10,000,000 $10,000,000-$15,000,000 35% $15,000,000-$18,333,333 38% $18,333,333 and above

The Good Cap $100k/$200k itemized deductions Elimination of the estate tax – appreciated assets donated to charity may not be excepted from the capital gains tax

The Good Maximum annual amount that can be claimed for gifts of cash increased from 50% to 60% of AGI. Five year carryforward for excess charitable contributions preserved.

The Good Contributions of appreciated securities and other assets held more than one year remain deductible at fair market value. Reduction of itemized deductions for higher income taxpayers eliminated. (Pease Limits) Lower income tax rates for most individuals.

The Bad…well maybe Lower income tax rates for most individuals. Standard deduction almost doubles to $12,000 for single filers and $24,000 for married couples filing jointly. Personal exemption is eliminated. Limitations on deductions for state and local taxes, and mortgage interest.

Old Law Rates Set for 2018 Marginal Tax Rate Single Married Filing Jointly 10% $0-$9,525 $0-$19,050 15% $9,525-$38,700 $19,050-$77,400 25% $38,700-$93,70 $77,400-$156,150 28% $93,700-$195,450 $156,150-$237,950 33% $195,450-$424,950 $237,950-$424,950 35% $424,950-$426,700 $424,950-$480,050 39.6% Over $426,700 Over $480,050

New Federal Marginal Tax Rates Individuals Married Filing Jointly 10% Up to $9,525 Up to $19,050 12% $9,526 to $38,700 $19,051 to $77,400  22% 38,701 to $82,500 $77,401 to $165,000 24% $82,501 to $157,500 $165,001 to $315,000 32% $157,501 to $200,000 $315,001 to $400,000 35% $200,001 to $500,000 $400,001 to $600,000 37% over $500,000 over $600,000

Standard Deduction Dollar amount that non-itemizers may subtract from their income before income tax is applied. Taxpayers may choose either itemized deductions or the standard deduction, but usually choose whichever results in the lesser amount of tax payable. Tax Filing Status Previous Standard Deduction (Set to Take Effect in 2018) New Standard Deduction Single $6,500 $12,000 Married Filing Jointly $13,000 $24,000 Married Filing Separately Head of Household $9,550 $18,000

Long Term Capital Gains Tax Rate Gains Rate Single Taxpayer Married Filing Jointly Head of Household Separately 0% Up to $38,600 $77,200 $51,700 15% (+3.8%) $38,600- $425,800 $77,200- $479,000 $51,700- $452,400 $239,500 20% Over

Alternative Minimum Tax (AMT) Tax Filing Status 2017 AMT Exemption Amount 2018 AMT Exemption Amount Single or Head of Household $54,300 $70,300 Married Filing Jointly $84,500 $109,400 Married Filing Separately $42,250 $54,700

Most of the Individual Tax Breaks are Temporary Most of the changes to individual taxes made by the bill are temporary — they're set to expire after the 2025 tax year. The notable exception is the change to the Chained CPI as a means to calculate inflation. In simple terms, this means that the income thresholds for each marginal tax bracket will rise more slowly than they previously would, which will presumably make a greater portion of each worker's income subject to higher marginal tax rates over time. The combination of the temporary nature of the tax cuts and the permanent switch to the Chained CPI is expected to have the eventual effect of higher taxes on the middle class, as compared with current tax law.

State and Local Taxes The Act allows state and local income and property taxes to be deducted up to $10,000. This will effectively amount to a repeal of the deduction for state and local income taxes for high-income individuals and can be expected to have a particularly adverse effect on high-tax states such as New York and California. Oh, and Oregon…

Mortgage and HELOC Since the Tax Reform Act of 1986, the mortgage deduction had a limit of only deducting the interest on the first $1,000,000 of debt principal. Interest on any additional mortgage debt used for any other purpose, was only deductible for the next $100,000 of debt principal (Typically HELOC). Under the TCJA the debt limit on deductibility for acquisition indebtedness is reduced to just $750,000 (albeit grandfathered for existing mortgages under the old higher $1M limit), and interest on home equity indebtedness is no longer deductible at all starting in 2018.

The Bad…well maybe Benjamin and Betty Beaver Income: $300,000 Federal Tax Rate 33% Oregon Tax: $25,000 Property Tax: $7,000 Total Deductions: $32,000 Gift to OSUF: $10,000 Tax Savings: $3,300 “Cost” of OSUF Gift: $6,700

The Bad…well maybe Income: $300,000 Federal Tax Rate 24% Oregon Tax: $25,000 Property Tax: $7,000 Total Deductions: $10,000 Standard Deduction: $24,000 Gift to OSUF: $10,000 Tax Savings: $3,300 “Cost” of OSUF Gift: $10,000

Will Fewer Itemizers Impact Charitable Giving? Doubling the standard deduction is estimated to reduce the number of itemizers from 37 million to 16 million, or about 1 in 7 taxpayers (14%). The 16 million who will continue to itemize historically account for 60% of individual giving. Probably more for OSUF. The 21 million who will no longer itemize account for about 18% of individual giving. Middle-income households claiming the charitable deduction will drop from 17% to 5.5%. A study by the Lilly Family School of Philanthropy projects a potential decline in charitable giving of 1.7-4.6% due to the increased standard deduction.

Giving Strategies for 2018 Increase charitable gifts or aggregate charitable gifts to itemize deductions to maximize annual deduction: 60% of AGI. Contribute appreciated securities or real property outright or to CRT to increase retirement income. Designate a charity as beneficiary of a retirement plan and avoid taxes on future distributions. Make an IRA rollover gift (age 70½+) and save taxes without itemizing deductions. Leave a bequest to charity…it costs nothing today and is an investment in the future.

2018 Strategy #1: Stockpile Gifts via Donor Advised Fund (DAF) Case: Donor has been claiming itemized deductions of $15,000 annually, including charitable gifts of $10,000. As of 2018, donor will no longer be eligible to itemize deductions. Planning Strategy: Make direct charitable gifts in 2018 as usual, plus a large lump-sum gift to a Donor Advised Fund (DAF) that will be used to fund charitable distributions in future years. Itemize deductions for maximum tax savings. Use DAF for all charitable giving in off-years, claiming standard deduction. Repeat when Donor Advised Fund runs low.

2018 Strategy #2: Lock in Gains through Charitable Giving Contribute appreciate securities or real property for maximum impact. Assets must be held for more than one year. Eligible for deduction at full fair market value. Avoid 100% of any potential capital gains tax. Maximize current impact through outright gifts. Maximize current or future retirement by using to fund charitable gift annuity or charitable remainder trust.

2018 Strategy #3: Support Charity with an IRA Rollover Taxpayers over age 70½ must take Required Minimum Distributions from IRAs and other qualified retirement plans. RMDs are 100% taxable to recipient. Strategy: Taxpayers may direct up to $100,000 of annual Required Minimum Distribution from an IRA to charity as a Qualified Charitable Distribution. Benefit: Saves taxes by reducing taxable income even if donor doesn’t itemize deductions.

Gift and Estate Taxes Estate tax deduction for 2018 increases to $11.2M for individuals and $22.4M for couples. Estates above this will pay an estate tax rate of 40% The same deduction and rates apply to non-charitable gifts and GST. Annual non-charitable gift-tax deduction indexed upward from $14,000 to $15,000 in 2018.

The Bad…well maybe Couple has an estate valued at $15mm They have included a $1mm bequest to OSUF The rest is bequeathed to their children Old Law The $1mm bequest to OSUF is deductible Tax savings: $400,000 “Cost of gift: $600,00

The Bad…well maybe Couple has an estate valued at $15mm They have included a $1mm bequest to OSUF The rest is bequeathed to their children New Law The $1mm bequest to OSUF is not deductible Tax savings: $400,000 “Cost” of gift: $600,00 “Cost” of gift: $1mm

The Bad…well maybe Couple has an estate valued at $15mm They have included a $1mm bequest to OSUF The rest is bequeathed to their children Old law: Children inherit $13mm after-tax New law: Children inherit $14mm after-tax

Bigger Pie: More for All New Law Old Law

2018 Strategy for Estate Donors Know an estate donor with an estate of $10mm to $25mm?

The Ugly TCJA includes two elements relevant to college sports: the elimination of an 80 percent deduction for donations tied to season tickets the creation of a 21 percent tax on salaries for nonprofit employees earning more than $1 million.