This week, House and Senate negotiators reached a deal on their tax bills, setting the stage for floor votes in each chamber as early as next week. The Senate will likely vote first, with rumors of a Tuesday, Dec. 19 vote. Then, the House will quickly follow in an attempt to get the tax bill to the president’s desk before Christmas. The speed of this process is not without controversy, as Democrats are calling for the Senate vote to take place after Senator-elect, Doug Jones of Alabama is seated. Democrats point to the time when voters flipped a long-time Democratic seat to a Republican in Massachusetts; the next steps were clear: Republicans demanded a delay in important legislation until the will of the voters could be heard on Obama’s landmark health care legislation. The Democrats, including President Obama, agreed. However, the desire to have a Republican legislative win and pressure from the administration, only has this Congress moving forward without hitting pause on this bill.
What Is in the Deal
To begin on a good note, the Johnson Amendment, which protects nonprofits and religious organizations from becoming involved in politics, is not in the final bill. The Alliance network’s advocacy contributed to this important win for our sector and for the country as a whole. If the Johnson Amendment had been weakened or repealed, it was predicted that it would have caused billions of dollars in charitable donations to be shifted away from human services and other nonprofits in order to support political candidates and issues through churches and nonprofit, partisan-leaning groups. Donors would have been eligible to receive tax deductions for supporting political candidates. It would also have eroded public trust in the nonprofit sector.
Corporate Tax Rate
Current law: 35 percent
Proposed: 21 percent, beginning in 2018. This is up one percentage point in the conferenced version of the bill.
Individual State and Local Tax Deductions
Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.
Proposed: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes.
Affordable Care Act Individual Mandate
Current law: An individual who fails to buy health insurance must pay penalties of $695 (higher for families) or 2.5 percent of their household income—whichever is higher, but capped at the national average cost of the most basic, low-premium, high-deductible plan.
Proposed: Repeal the penalties, disrupting insurance premiums for everyone.
Charitable Tax Deduction
Current law: 50 percent adjusted gross income limitation. The 50 percent limit applies to the total of all charitable contributions you make during the year. This means that your deduction for charitable contributions can't be more than 50 percent of your adjusted gross income for the year, but there is a higher limit for certain qualified conservation contributions.
Proposed: Increase the adjusted gross income limitation on cash contributions from 50 percent to 60 percent.
Medical Expense Deduction
Current law: Qualified medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income are deductible.
Proposed: Reduce the threshold to 7.5 percent of adjusted gross income for the tax years 2017 and 2018. This will have the greatest impact on individuals with disabilities and chronic illness.
Child Tax Credit
Current law: A $1,000 credit for each child under 17. The credit begins phasing out for couples earning more than $110,000. The credit is at least partially refundable to qualified taxpayers who earned more than $3,000.
Proposed: Double the credit to $2,000 and provide it for each child under 18 through 2024. Raise the phase-out amount to $500,000, and cap the refundable portion at $1,400 in 2018.
Current law: Applies a 40 percent levy on estates worth more than $5.49 million for individuals and $10.98 million for couples.
Proposed: Double the thresholds so the levy applies to fewer estates. The higher thresholds would sunset in 2026.
Private Activity Bonds
Note: The status of private activity bonds in the Tax Cuts and Jobs Act is still unclear, but the Alliance should have these details before Monday.
Impact of Tax Code Changes on the Nonprofit Human Services Sector
There is likely to be a tremendous loss to charitable giving even though the charitable tax deduction is retained. Because the bill doubles the standard deduction, fewer people will itemize. It is predicted that there will be a $13 billion annual loss in charitable giving to the nonprofit sector and a concern that there will be an erosion to the culture of giving in the country.
The bill reduces revenue and contributes to the federal deficit by over a trillion dollars. Since this tax bill is traveling through Congress by way of the reconciliation tool, any legislation that impacts the deficit in a significant way must trigger forced sequestration, or PAYGO. If triggered, the first sequestration cuts to federal programs would go in effect as early as January. If no legislative action is taken to waive sequestration, there will be cuts to certain mandatory programs such as Medicare and the Social Services Block Grant, among many others. While Medicare can receive no more than a four percent reduction, other programs could be completely eliminated.
With a deep deficit already in place, and a tax bill that is not seen as having an economic growth rate able to pay for the loss in corporate taxes, the next set of cuts to federal funding of human services will likely occur during the appropriations process in 2018. This is when programs, such as health care and research, education and training, transportation some low-income assistance programs, and veterans programs that are funded by discretionary spending will be targeted to pay for the loss in federal revenue.
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