Integrated Generosity for Faith Based Families – 2018 Tax Reform update and outlook
In the introduction to my 2016 book Integrated Generosity for Faith Based Families – Moving from Involuntary Philanthropy toward Intentional Stewardship and Directed Generosity, I make the point that there three things in life that are certain – death, taxes and change. While the first two come with significant qualifiers, the third – change – is expanded on as follows:
“The tax and social environments in the United States are constantly changing; therefore, we must embrace and adjust to change as it happens and continue on the path of good stewardship with the financial resources with which God has blessed us. Resting on one’s laurels because of past accomplishments, and not continuing to strive to reach our maximum potential, represent a lack of good stewardship.”
It is in the spirit of these comments that this update – specific to the recent tax reforms passed at the end of 2017 and taking effect in 2018 – is provided.
The more things change, the more they stay the same
The 2017 Tax Cuts and Jobs Act included a number of changes that impact – from slightly to significantly - the strategies and concepts provided in Integrated Generosity for Faith Based Families.
As a point of reference, for those who have not read the book, “Involuntary Philanthropy” is the payment of income tax, capital gains tax, or estate tax which could otherwise be reduced or eliminated through effective “tax stewardship”, using both charitable and non-charitable tax planning measures and strategies.
Families for whom the Integrated Generosity strategies are most impactful are in the 1) highest marginal tax brackets, 2) have significant embedded gains in assets such as real estate and business interests, 3) may be subject to estate taxes at death and 4) are charitably active in their contributions and charitable planning to a much greater degree than average households. With this in mind, here are the primary impacts of the 2017 Tax Cuts and Jobs Act:
Income Taxes:
- Across the board, marginal tax rates were reduced, with the top marginal tax rate dropping from 39.6% to 37%. Additionally, the top starting income levels for each successive tax bracket were increased across the board. For example, in 2017, the 39.6% bracket started at 500K of income for a married couple filing jointly, while in 2018, the same couple does not reach the 37% bracket until their taxable income reaches 600K.
- Regardless of income level, almost all households realize a reduction in their income tax bills. For those in states which have income taxes, as well as households with high levels of property tax, the income tax savings from the changes in tax brackets and rates are somewhat mitigated due to the $10,000 limit on deductions for state and local income and property taxes The other mitigating factor is the reduction on mortgage interest deductibility, limiting the deduction to the interest on balances up to $750,000 (for new mortgages).
The general impact here is a reality of slightly greater household cash flow and prosperity, which contributes to the economy at many different levels. It is estimated by the Tax Policy Center that the highest fifth earning households will see an increase in their net after tax cash flow by 2.9%. Greater net after tax cash flow also may lead households to increase their giving. Many lower income households will indirectly benefit from corporate income tax reductions, which many employers are passing along to their workers in the form of raises and bonuses.
- For those families that were already “maxed out” at 50% of AGI (Adjusted Gross Income) for their charitable contributions, there is little doubt that they will be taking advantage of the increase to 60% of AGI. Outside of this single change, not much else in the charitable arena was directly impacted, relative to high impact givers. Conversely, the higher standard deduction will result in fewer households itemizing deductions. This could have a negative effect on charitable contributions for non-itemizers. One would hope that faithful givers will continue their charitable contributions at the same levels, regardless of the deductibility or tax benefit of their contributions.
Respective of “lifetime giving” (what I refer to as directed generosity), the increase in deduction limits enhances the impact of many of the strategies described in Integrated Generosity, which focus on bringing the income tax “toll” (aka involuntary philanthropy) down to its lowest possible level.
Estate AND GIFT Taxes:
- Under the new (but not permanent) law, the estate tax exemption is raised to $11.2 million for individuals, and $22.4 million for couples. This is only temporary relief, as this will revert to the prior exemption limits – indexed for inflation – in 2026 when the Act sunsets. This could occur as soon as 2021 if the political power shifts from Republican to Democrat during the 2020 election cycle. Certainly, the 2018 mid-term elections will be quite telling as to what we can expect in 2020!
This increase is a wide window of opportunity for families to exercise greater planning strategy for “intentional stewardship” in respect of wealth transfer planning to future generations of their family members. This is due to three factors: a) the estate exemption also applies to gifts made to family members during life, and b) the availability of strategies to leverage lifetime gifts by a factor of 10 to 15 or more and c) the continued ability to utilize valuation discounts – 30% to 35% being fairly common - to further leverage lifetime gifting and wealth transfer strategy.
Corporate and Partnership Tax Rates:
- 21% corporate tax rates:
- Double taxation still present, but the use of dollars within a C-corporation net of a 21% tax rate opens the door to numerous non-qualified deferred compensation strategies that were much less attractive in the prior 35% corporate tax rate environment.
- 20% deduction for qualifying pass through entities:
- The question often arises, in planning for various business entities, which is best, a c-corporation or a past through partnership or LLC structure? In most cases (and this was true before the 2017 Tax Cuts and Jobs Act was passed), families with business interests are well served to have both structures, in order to take advantage of the tax reduction opportunities presented by both structures.
- Depreciation of Business Assets:
- Bonus depreciation increased to 100%, expanded to include additional property classes including used property.
- Qualified leasehold improvements now enjoy a 15-year recovery period.
- Cost segregation of certain building components now becomes more important as the asset classes that qualify for Section 179 have been expanded, subject to one-million-dollar limit.
How do these changes impact charitably inclined, high impact families?
- Utilizing a proper combination of illiquid asset gifts combined with giving out of cash flow to maximize the 60% of AGI deduction window.
- Increase and acceleration of “recapture and redirection” tax reduction strategies to minimize impact of “involuntary philanthropy” allowing the shift towards greater intentional stewardship (family wealth transfer) and directed generosity (increased lifetime charitable gifts).
- Investigate and implement charitable planning strategies in advance of the sale of a large business or capital event.
- Capitalize on larger opportunities for greater impact in respect of “Intentional Stewardship” and family legacy planning due to the temporary window of the increased lifetime exemption amounts.
What should you do:
- If you represent a charity – become well versed in the impact and opportunities these changes represent, and pro-actively share with your major clients, influencers, and business owner donors.
- If you are part of a “high impact/high capacity” family – press your current team of advisors to be certain that all planning opportunities – charitable and otherwise – are evaluated and acted upon as appropriate. If you don’t like the answers you get or feel that your advisors vision is not in line with your own, then it may be time to “seek wise counsel” for a fresh look at your circumstances and opportunities.
Mark Trewitt is the author of Integrated Generosity for Faith Based Families – Moving from Involuntary Philanthropy toward Intentional Stewardship and Directed Generosity, and the managing partner of Integrated Financial Solutions Group.