The new tax law, the Tax Cuts and Jobs Act, despised by a great majority of the public and leading nonprofits, is now law. Nonprofits should be aware of these provisions and how they may impact their fundraising and operations.
Part 1 – Fundraising
The following temporary* provisions in the Act impact donors and the tax benefits they may receive from making a charitable contribution. Charities should be aware that analysts expect such provisions to reduce charitable giving by about $16 billion to $24 billion (about 6-9%) per year.
* these provisions expire after 2025
While we all would like to believe that our donors are solely motivated by an altruistic desire to support our charitable missions, we should not discount that for some donors, the charitable contribution deduction is part of an array of reasons to make a charitable gift. And we should respectfully understand that the unavailability of the deduction may influence if, and how much, they will give. Further, it may allow many donors with a new choice to give to a 501(c)(3) charitable organization, 501(c)(4) social welfare organization, or for-profit social enterprise where no recipient can offer a donor a tax advantage. See A prediction for nonprofits in 2018: Rise of the 501(c)(4) organizations.
Increase in the standard deduction
Almost doubling the standard deduction will substantially reduce the number of taxpayers that can benefit from the charitable contribution deduction. While this provision will provide a higher overall deduction for many taxpayers, it will also depress charitable giving because only those who itemize their deductions, instead of taking the standard deduction, get the benefit of a charitable contribution deduction.
The Act raises the standard deduction initially from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples. Experts estimates that the provision will radically decrease the number of taxpayers who itemize their deductions – from about 30% of taxpayers in 2017 to 6% in 2018. As a result, charitable giving is expected to drop from between $12 billion to $20 billion per year, further resulting in a projected loss of about 220,000 to 264,000 nonprofit jobs. See Tax Policy Center – The House Tax Bill Is Not Very Charitable to Nonprofits; National Council of Nonprofits – Tax Cuts and Jobs Act, H.R. 1 Nonprofit Analysis of the Final Tax Bill.
This provision will also result in more “bunched giving” where instead of making annual gifts to charities, donors choose to accumulate their giving dollars over multiple years to make several years’ worth of gifts in one year. This strategy could be employed to cause their itemized deductions (including the charitable contribution deduction) to be higher than the standard deduction. See How to Write Off Donations Under the New Tax Plan: Consider ‘Bunching’ (NY Times).
Doubling of the estate and gift tax exemptions
Doubling the estate and gift tax exemptions will mean that far fewer wealthy taxpayers will be hit with a very hefty tax (40%) for leaving or gifting money to their children. And those who still have to pay such taxes will have much more of their transferred wealth exempted from being taxed.
Many wealthy taxpayers who are subject to these taxes work with their tax planners to mitigate and minimize the taxes they would have to pay, and deductible charitable contributions are often a big part of their strategies. There is an entire industry of charitable tax planning (planned giving) that assist such taxpayers. But the lesser the amount subject to tax, the less planning needs to be done.
The higher exemption amount, which is expected to be about $11.2 million in 2018, is expected to reduce charitable contributions by about $4 billion per year. Independent Sector notes that “[i]n 2010, when the estate tax was temporarily repealed, gross charitable bequests in IRS tax filings totaled $7.5 billion – a 37 percent drop from $11.9 billion the prior year.”
Limitations on deductions for state and local taxes and home mortgage interest
Limiting the aggregate amount of state and local income taxes (SALT), including property taxes, that can be deducted by itemizers to $10,000 will result in higher taxes for many taxpayers in states such as California, New York, Massachusetts, Oregon, and Connecticut with high real estate values and high state and local taxes. The greater tax burden on these individuals may depress their ability to make charitable contributions. Certain states are so concerned about this highly controversial limitation that they are looking at workarounds. See Will California Bid To Substitute Charitable Contributions For State Taxes Work? (Forbes).
The Act also reduces the cap on the home mortgage interest deduction for new loans from $1 million to $750,000 in principal value and repeals the deduction for interest paid on home equity debt. See Tax bill 101: What the new law means for homeowners (Curbed). Again, the impact on some homeowners will be higher taxes and therefore less to spend on charitable giving.
Increase in the maximum annual amount of charitable contribution deduction
One of the beneficial provisions in the Act for charitable giving is the increase in the amount of a deduction an individual can take for giving cash to a charity (or operating foundation) from 50 percent to 60 percent of her or his adjusted gross income (AGI).
Repeal of limitation on itemized deductions
Another of the beneficial provisions in the Act for charitable giving is repeal of the “Pease” limitation on certain itemized deductions (including for charitable contributions, home mortgage interest, and state and local taxes). In 2017, the limitation applied at an AGI threshold of $261,500 for a single taxpayer. Above that threshold, a taxpayer’s itemized deductions would be reduced by the lesser of (a) 3 percent of AGI above the applicable threshold; or (b) 80 percent of the amount of itemized deductions otherwise allowable for the tax year.