While there is a lot of information to be unveiled about the new tax law, it will negatively impact charitable giving in 2018 and into the future.
Let’s start with the good news about the Tax Cuts and Jobs Act (H.R. 1, “TCJA”). Under prior law, taxpayers could not deduct more than 50% of their adjusted gross income in charitable contributions. The new law increases this limit to 60% for those individuals who itemize their deductions (approximately 30% of taxpayers). This limit increase could be a motivating factor for donors – especially those who are wealthy and more likely to itemize - to make larger donations to charities next year.
The flipside of this coin is that it is estimated that less taxpayers will itemize: only 5% of individuals instead of 30% according to Urban-Brookings Tax Policy Center. The TCJA roughly doubles the standard tax deduction to $12,000 for individuals and $24,000 for couples. The assumption is that a higher standard deduction means fewer taxpayers will itemize their deductions on their tax returns, reducing the incentive to give to charities.
TCJA also eliminates another charitable incentive. Many donors make charitable gifts in their will to lower their estate taxes, however, under the new law, estates worth up $11 million per person ($22 million per married couple) are exempt from the federal estate tax starting in 2018, double the amount in 2017.
For the first time in 7 years, 2018 will see a decline in charitable giving. According to Giving USA, $309.05 billion was donated in 2016. The new tax law may reduce charitable giving by 1.7% to 4.6% or $4.9 and $13.1 billion per year according to a study conducted by the Indiana University School of Philanthropy and Independent Sector. Other reports estimate that charitable giving could drop as much as $20 billion per year.
It’s completely baffling why the government would want to eliminate tax benefits for charitable giving – especially when it is the entity responsible for the creation of the charitable tax deduction in the first place. History demonstrates how the government has utilized the law to manipulate donations over the years. In 1917, the government greatly increased federal income tax rates, lowered exemptions and introduced the individual income tax deduction for charitable donations as an incentive for taxpayers to make donations to charitable organizations.
In the 1970’s, the nonprofit sector emerged around the civil rights movement and because the government could not afford to support all the human services needed in our country. Instead of providing direct services, the government offered charitable tax incentives – passing the buck to nonprofits.
Today, the new law will focus the reason for donating back on the heart of the matter. Individuals will literally have to give to nonprofits “for the right reasons”. Since tax savings will not be the primary reason for giving most donors, they will need to be compelled by the organization’s mission and programs. Charities will have to work harder to retain the same donation amounts from their donors next year. Many charities will see a dramatic drop in donations. Donors will stop giving because they no longer receive the tax incentive or because they are waiting for more information to emerge about the law before making donations.
All of the provisions of TCJA take effect on January 1, 2018, so they will not affect 2017 taxes. So, what can you do now to support the nonprofit sector?
If you like your current tax incentives as a donor, donate now for next year!
If you are a fundraiser, encourage your donors to make donations before the end of the year under the current 2017 tax laws that have more incentives. Jewish Family Services of San Diego sent out an email encouraging their donors to make a donation in 2017 to support 2018 programs by:
· Pre-paying an existing pledge.
· Purchasing 2018 Gala tickets today.
· Giving before December 31 (instead of in 2018) to support programs
Unfortunately, there is not a lot to be “happy” about in The New Year for charities. The new law forecasts a bleak and tough year of fundraising. May every taxpayer’s resolution to continue financially supporting their favorite charities regardless of tax benefit.