The 2017 Tax Cuts and Jobs Act (the Act) passed by Congress on December 22, 2017 marks the most significant tax law changes in over 30 years. Most taxpayers will see their tax liability decrease. The Congressional Budget Office estimates the Act will reduce tax revenues by $1.455 trillion over the next 10 years. But all is not good for non-profit organizations as there are changes in the Act that may negatively impact charitable contributions. The Tax Policy Center predicts that charitable giving will decrease in 2018 by 4 percent to 6.5 percent, or between $12.3billion and $19.7billion. An Indiana University Lilly Family School of Philanthropy study estimates that charitable giving will decrease 4.6 percent or $13.1billion because of the Act.
There are a few changes in the Act that will cause this decline in giving. The standard deduction is increasing; for single taxpayers from $6,350 in 2017 to $12,000 in 2018; for head-of-household from $9,350 to $18,000; and for married-filing-joint from $12,700 to $24,000. Itemized deductions for State and Local Taxes will be limited to a maximum of $10,000. Mortgage interest deductions will be reduced to acquisition indebtedness up to $750,000, previously $1,000,000. Miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor have been eliminated, including unreimbursed employee expenses, home office deductions, tax preparation fees, investment fees, and expenses, safe deposit box fees, among others. Personal Casualty Losses will only be allowed resulting from federally declared disasters. The doubling of the standard deduction amounts and changes limiting itemized deductions will result in fewer taxpayers claiming itemized deductions because of the Act. The Act also doubled the life-time exemption amount for Estates and Gifts from approximately $5.5million to $11million, which will influence some taxpayers to forego charitable contributions and transfer wealth to their heirs instead.
The Tax Policy Center estimates that taxpayers receiving a tax benefit from claiming charitable contributions will decrease from 37 million under the old tax law to 16 million returns under the new Act. The Tax Policy Center also estimates that the tax subsidy for charitable giving will decline from 20.7 percent to 15.2 percent. The tax subsidy is the amount of tax benefit that a taxpayer receives for claiming a charitable deduction as an itemized deduction. If I make a charitable contribution when I’m in the 25 percent tax bracket, assuming that I have enough itemized deductions to exceed the standard deduction amount, then my tax subsidy on my contribution is 25 percent. The reason that the Tax Policy Center projects that the tax subsidy will decrease 5.5 percent from 20.7 percent to 15.2 percent is because fewer taxpayers will benefit from claiming charitable deductions on their returns due to the increase in the standard deduction and changes diminishing itemized deductions.
Look for donor giving patterns to change because of this Act. For donors below the standard deduction, a tax planning strategy would be to bunch their contributions for two or three years into one tax year. For example, a donor may choose to defer their giving from 2018 and then make contributions in January 2019 and again in December 2019, thus doubling their contributions in one year in an effort to exceed the standard deduction. The use of Donor Advised Funds will become more prevalent. A donor could make a large contribution to their Donor Advised Fund, claiming a charitable deduction sufficient to exceed the standard deduction in one year with the direction to the Charitable Foundation to distribute those funds out to charities over the next several years. Donors over the age of 70 ½ with Individual Retirement Accounts may choose to make qualified charitable contributions directly from their IRA. Doing so keeps the distribution from being included in the taxpayer’s taxable income with no tax subsidy lost assuming that the donor would otherwise not be able to exceed their standard deduction.
Fundraisers should continue to engage donors. Tell your story. Communicate your needs and fundraising goals. Remember that people don’t give to charity just for the tax subsidy. Millions of non-itemizers contribute to charity each year and will continue to do so. Donors give when they connect to the organization and receive internal satisfaction that comes from giving. Nonprofits should continue to cultivate donor relationships with the knowledge that the Act will reduce the tax benefit from claiming a charitable deduction and thus less funds will be made available by donors for charitable contributions.
