Tax Law Spurs Charity by Phone
Question: Twice this month, I have gotten calls from charitable causes I have never heard of before. Both times, the callers were very persistent and implored me to send money right away before the tax law changes. Do you know if legitimate charities really are using tax reform as an excuse to ask for more money? Or should I be worried about a scam?--F. R.
Answer: Certainly, charities have a strong incentive to accelerate their fund-raising efforts between now and Dec. 31. Till then, virtually everyone who gives money to charity gets a tax writeoff in exchange for their philanthropy. But from Jan. 1 on, taxpayers who don’t itemize their tax deductions will get no tax break whatsoever for their charitable gifts. And most taxpayers who do itemize will find the allowed writeoff covering less of the gifts than now because the lower tax rates effective next year will make tax deductions less valuable.
Hence, many accountants are recommending that taxpayers give to charities this year what they had intended to contribute next year. And in a race for a share in these anticipated last-minute donations, some charities have indeed stepped up their donation drives.
So if you are getting calls from organizations you haven’t heard from before, that may be the explanation. On the other hand, the increased number of legitimate fund-raising calls make life easier for con men. So do be extra cautious over the holidays.
The volume of calls seeking charitable contributions is always greater at this time of year--both from legitimate charities and crooks. That is because consumers are thinking about last-minute writeoffs and the holiday spirit tends to put people in a giving mood.
With even more such calls expected this year, consumers will have a tougher time sorting out the legitimate from the illicit--especially because con men are thought by consumer protection groups to be using the same tax-reform sales pitch as are legitimate charities.
Q: I am one taxpayer who will lose the right to deduct an IRA contribution. But what makes me even madder is the rumor I have been hearing lately that most employers will soon stop offering 401(k) plans, too. Is there no end to the suffering of middle-class Americans?--S. M.
A: Actually, it is far more likely that just the reverse will occur. In other words, look for tax reform to spark more 401(k) benefits--not fewer.
These employee retirement plans--called 401(k) to indicate the section of the tax code that created them--do take a beating under tax reform.
Beginning next year, employees can defer no more than $7,000 in 401(k) contributions from their federal income taxes--a sharp reduction from the current $30,000 ceiling. But only very highly paid employees will be hurt by that cut. Most employers permit employees to save no more than 6% of their annual salary in a 401(k). So to reach the new $7,000 lid means you are earning about $116,000 a year.
In other words, middle-class employees by and large won’t be hurt at all by this tax law change. In fact, it is quite possible they will benefit from the revision.
Management consultants who specialize in employee benefit plans predict that many employers will sweeten their 401(k) plans, largely to help those employees who will be hurt by the tax law change--top executives. The sweetener, many predict, will take the form of a one-for-one match of the employee’s contribution to a 401(k), double the typical match now. This way, they can compensate executives for all or part of the lost deductions because the employer’s contribution to an employee’s 401(k) isn’t included when the yearly maximum is figured.
But the people who will benefit most if company matches are sweetened are lower-paid employees. Why? They would get twice as much from the employer and lose no part of their tax deduction because they don’t earn enough to be affected by the lower cap.
Say you earn $20,000 a year and you belong to a 401(k) plan that lets you defer up to 6% of your salary. Let’s also say your employer puts another 50 cents into that retirement fund for every $1 you contribute.
Under current law, you can save $1,200 of your own money plus another $600 from your employer. None of that $1,800 is taxed. If your employer decides to match your savings dollar for dollar next year, your 401(k) savings would grow to $2,400 a year. Again, all of it would be tax-exempt because you would still fall far below the new $7,000 annual ceiling.
High-level executives would be less fortunate. Let’s say the plan is the same but the employee earns $200,000 instead of $20,000. Currently, he can put $12,000 in the 401(k) and the employer contributes $6,000. All $18,000 is tax-exempt.
But under the new tax law, only $7,000 would be exempt from taxes. To help him out, the employer doubles the company match. Thus, the employee gets to defer $7,000, plus another $7,000 from his employer, for a total of $14,000. That is better than the $10,500 he could exempt from income if the company kept its 50% match, but it is still $4,000 less than the exemption he can claim under current law.
