President Donald Trump has signed the final omnibus tax-and-spending bill into law. This new legislation greatly improves the landscape for charitable deductions and university endowments. This legislation, once known as the “One Big, Beautiful Bill,” makes Trump’s 2017 tax cuts permanent. Even worse, it makes more insidious changes to impact deductions, overtime pay, and Medicaid.
The new law limits charitable deductions for individuals in the top tax bracket, which may disincentivize financial contributions from America’s wealthiest donors. Big earners will find that they have lost the ability to reduce their taxable income by their first $5,000 worth of charitable donations. We believe this change will revolutionize the way rich Americans think about their giving strategies. After all, charitable giving reached an all-time high of $590 billion last year. This unprecedented increase is a testament to the fact that the public is willing to invest, even at the cost of new taxes.
The changes in the legislation will take effect next year. Americans across the country will welcome these changes in tax policy as a result. Lawmakers have highlighted that without extending the tax cuts through this new bill, the cost of allowing them to expire would accumulate to trillions of dollars over the next decade, according to estimates from the Congressional Budget Office (CBO).
In terms of higher education funding, the new federal budget law places increased tax burdens on universities with significant endowments. Institutions with endowments over $2 million will have their tax rate doubled. At the same time, it means schools with endowments of $750,000 to $2 million will get a bump, increasing the number of schools taxed at 4% to 10%. Schools with fewer than 3,000 tuition-paying students would be exempt from this tax. Only about 15 schools will thus have to pay that high cost.
Just this year, 56 of our universities have reportedly paid just under $380 million in this endowment tax. This new fiscal burden would have serious consequences for research universities nationwide.
“The tax increase will impact some of the top research universities in the country.” – Sharon Epperson
In the last several days, financial experts have raised alarm over the broader implications of these changes. Maya MacGuineas pointed out the irony of going forward with new tax cuts for tips and overtime while at the same time limiting deductions for charitable giving. She stressed that financial shuffling like this needs real accountability and transparency.
“I think the irony of this, and what really demonstrates how disingenuous that argument is, is that at the same time in this new tax bill, there are a number of new tax cuts on tips and overtime and other things.” – Maya MacGuineas
Robert Frank has written on the unexpected consequences of this new system for high earners who itemize their deductions. He pointed out that the legislation effectively requires wealthy individuals to exclude a portion of their gross income from charitable deductions.
“Now to pay for that, it requires itemizers, i.e., the wealthy, to exempt from their charitable deduction the first half a percent of their gross income.” – Robert Frank
Now that these changes are being implemented, many people are wondering about their impact. They ask how these changes will impact philanthropic giving by individuals, and the financial health of educational institutions that rely on endowment income.