Capital Gains Could Hit Giving

Mid-August is about as dead as it gets in Washington, DC, especially in an even-numbered year. Serious legislating takes a backseat to campaigns, vacations, and pennant races. So, it’s safe to assume not much is happening in the tax policy world that could impact charitable giving, right?

Unfortunately, policymakers continue to defy our expectations. According to press reports and statements over the past couple weeks, the Trump Administration and its Treasury Department are giving serious consideration to a major change in tax policy: Indexing of capital gains.

In short, if a taxpayer purchases an asset like a stock or a home for $200,000 and sells it a decade later for $1 million, they owe capital gains taxes on the $800,000 difference between what they paid and what they sold it for. Conservative economists have long contended that this is unfair because it fails to factor in the cost of inflation over that time. If the Treasury goes forward with this proposal, that taxpayer would be allowed to adjust the “cost” they paid for the asset to include inflation, narrowing their recognized profit margin and lowering their tax liability. More liberal economists have pointed out that capital gains are already taxed at a lower rate than wages, and that the benefits of this change would accrue almost entirely to the wealthy.

This might all sound pretty tax nerdy, but it could have enormous consequences for charitable giving especially in the present policy context. As Independent Sector noted in a recent letter to Treasury Secretary Mnuchin, “With our sector already confronting significant headwinds from the 2017 tax law, we urge you to consider the potential negative impact that this change could have on charitable organizations nationwide and the millions of Americans who they serve.”

Over the next decade, indexing capital gains for inflation would wipe out over $100 billion in tax liability, the vast majority of which will be for households in the top 1 percent on income. When confronted with a potentially large capital gains tax bill, many donors have historically considered it an opportunity to either donate their proceeds, or the asset itself to charity. Changing that equation could do great harm to charities.

Right now, the Treasury is still reportedly considering whether they have the authority to make this change without direction from Congress. Previous administrations have considered this question and determined that they did not have such authority, but this administration has proven willing to break with precedent in the past. In late July, Congressman Devin Nunes (R-CA) introduced legislation that would have a similar effect on capital gains policy, so the issue bears watching.

Types: Blog, Policy Update
Global Topics: Administration, Public Policy
Policy Issues: Charitable Deduction, Charitable Giving, Federal Budget & Fiscal Policy, Tax & Fiscal Policy